Although investment is an inherent part of every working individual’s life, even in today’s world, many people do not know much about the financial world. They carry on making investments based on the recommendations of their friends and family and often fall prey to poor investments. Scott Tominaga, an expert in understanding investment profiles, delves into hedge funds and provides an overview of them to educate the masses about this lucrative form of investment.
What is a hedge fund?
The term hedge has been assigned to it considering how this investment instrument is managed. In this type of investment, a part of the assets is invested in another fund that is in another sector. For example, a person who primarily invests in travel, which is a cyclical sector, will invest a portion of it in some other non-cyclical sector, such as energy for instance. In this way the investment is protected in case the market falls; the returns from one sector will help cover the loss in the other sector.
The hedge fund risks
There can be no denying the fact that hedge funds involve high risks, says Scott Tominaga. These funds invest in derivatives. Derivatives are contracts signed between two parties that involve some underlying asset on which the value of the investment is dependent. These come with their risks and the number of assets invested here can be of any number.
Who invests in hedge funds?
Accredited investors are commonly found investing in hedge funds. Those investors who are allowed to trade securities that are unregistered with the financial authorities are known as accredited investors. They are allowed to do so by virtue of any of the following – their net worth, the size of their asset, their professional experience, or their governance status.
In simple terms, these are investors who are financially affluent, and sophisticated and have a negligible need for the protection of funds. It is thus that institutional investors such as insurance companies, pension funds, and wealthy people are seen investing in hedge funds.
Types of hedge funds
Scott Tominaga and other experts in hedge funds would list the various types of hedge funds as follows:
- Global macro hedge funds – some economic or political event forms the basis of this fund’s profit
- Equity hedge fund – this could be specific to a single country wherein the investments are made in other lucrative stocks as a hedge from the dips in the equity market
- Relative value hedge fund – there may be temporary differences in the prices of certain securities, this hedge fund takes advantage of that price difference to make its investment.
- Activist hedge funds – these are an extremist form of funds that may even force the sales of a company. They involve discussions with the board of directors and may also liquidate assets.
- Funds of funds – this is a more passive form of investment as it invests in other hedge funds.
Thus, irrespective of the type of hedge fund, it can be safely established that a hedge fund is not for everyone. However, those who do not have worries about risking their money must invest in this type of investment tool since the returns are rather profitable.