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January 23, 2006
Understanding hedge funds
'Hedge funds', the term is being increasingly used by investors. Investing in hedge funds is favored by sophisticated investors and a number of Swiss banks and other private banks. These investors understand the consequences of major stock corrections. An increasing number of pension funds and endowments allocate assets to hedge funds.
In fact, the hedge fund industry is estimated to be a $1 trillion industry and it is growing at a rate of about 20 per cent per year. There are currently 8350 active hedge funds. These include a variety of investment strategies. A number of these strategies use leverage and derivatives while others are more conservative and employ little or no average.
Most hedge funds are highly specialized and their performance relys on the expertise of the manager or the management team. Hedge fund managers are usually highly professional, disciplined and diligent.
The returns from hedge funds are usually consistent and have over a period of time outperformed standard equity and bond indexes. These have a much lower risk factor as compared to equities. Conventional equity or mutual funds are generally 100 per cent exposed to market risk and are affected by the direction of the bond or equity market. The performance of most hedge fund strategies, in particular relative value strategies, is not dependent on these.
With a clear understanding of the advantages of hedge funds, most investors are seeking to capitalize on the benefits offered by these.
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