Hedge fund definition
It is impossible to give a complete definition that can give clarity to the concept of a hedge fund. Any attempt to do so would prove confusing and deliberately unequivocal. Hedge fund has also remained undefined in the books of state securities laws, primarily because there is no scope to give a comprehensive business meaning or general credibility to this form of economic activity. The term hedge fund does not identify any particular hedging strategy. A hedge fund can only be roughly defined as any unregistered, privately-offered, managed pool of capital for wealthy and sophisticated investors.
Hedging is an investment activity that employs highly risky strategies, like short selling and money borrowing to make quick and big money. In it, there are around nine thousand hedge funds. These are not registered in the SEC. Their data is self reported and their performance is self responsible. The total value of assets in hedge funds is estimated to be around 1.3 trillion $ in terms of asset. Besides this, there is a constant inflow of huge capital being invested in this form of funding every year. Only the filthy rich are able to invest in hedge funds to get richer, as it requires a huge capital to be put at risk.
How does a hedge fund work?
Hedge funds are normally partnership ventures, with the general partner acting as a portfolio manager. He is held liable for all the investment strategies and risks. The limited partners normally play the role of investors. Hedge funds are famous for ignoring market trends and indices. They remain completely focused on their targets as individualistic performers. This they are able to do due to the vast reserves of funds at their disposal, which come with an ability to bear losses. Hedge the people who give money are constantly struggling to cash on financial market loopholes, through a number of experts trading techniques; encompassing varied investment and trading opportunities in shares, mutual funds, bonds, fixed income products, CTA portfolios and several mathematical computations. They are designed to exploit market inefficiencies. However hedge funds are compelled to follow all the marketing rules and regulations of other trading activities. They operate on the mantra of absolute returns employing off beat strategies at high risk. After all it was the study of unorthodox means for capital enhancement in share markets, which had laid eggs for the birth of Hedge Funds, in the mind of a notorious journalist.
Origin
The history of Hedge fund, is actually a very interesting story about the intelligent efforts of an audacious individual. The year was 1964. World war two had just ended, and the whole world had come together in the spirit of celebration. At this time, a man called Alfred Winslow Jones was appointed by fortune magazine to do an assignment on the stock market. This required the aspiring sociologist to investigate and research the fundamentals and techniques of stock forecasting. The study opened the doors to an enchanting world of opportunities for Alfred. The vision inspired him to cultivate a new and daring concept of investment funding. He was completely captured by his idea; and launched an investment fund appointing himself as general partner even before releasing the given article for fortune magazine. His speculative mind had set up the design for a market-neutral technique of trading, wherein the long positions in undervalued scripts could be offset by short positions in other equities. This was meant to form a protective hedge to minimize the risk of financial loss. The so called hedged position was supposed to allow capital leveraging, while allowing large profits to be made through limited funding. Alfred Jones was also impelled to introduce an ingenious stroke to his scheme by levying an incentive fee of 20% exclusive profits. The fund was kept completely free from any fixed fees. His call to study unorthodox methods of trading in the stock market had led to the making of history.
Growth
In present times; most of the hedge funds are still employed in the practice of trading long and short. But there are some hedge funds which refrain from indulging in stock trading altogether. Instead they focus their resources and energies on other financial products like futures and options, derivatives, debt market, commodities etc. The recently published data of HFR a Chicago based Hedge Fund Research group estimates the worth of hedge fund industry at 1.225 trillion $ ?? in terms of asset under management. This statistic was released in the second quarter of the year 2006. The hedge funds rate of growth was shown 19% more than the previous year. Further statistics revealed a growth, which had nearly doubled in a period of three years.
The typical hedge fund techniques or strategies of leveraging (borrowing money for investment purpose), short selling (which depicts the anticipatory sale of a script that one does not own and which is purchased in the future at a lesser price), Arbitrage (which means the trading of securities in different markets to benefit from the cost differences) and hedging (which means buying and selling of financial products to offset the risk of a potential loss) makes their market positions more than the assets they own. There was an increase in the number of hedge funds by 15% between 2006 and 2007, according to a survey done by Tower Group. To sum up hedge funds have escalated in size as well as number in recent times. They have also served to revolutionize the reach and deepen the dynamics of public securities and private investment financial markets.
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