Hedge Funds And Traditional Funds

Hedge funds are alternative investment strategies and are considered in a different asset class as compared to traditional assets like property, equities, bonds and cash. The only similarity they share with traditional investment strategies is that hedge funds do invest in publicly traded securities like equities and bonds. This is where the similarities between the two end.

Hedge fund is an altogether different style of asset management aiming to generate stable and positive returns while avoiding the traditional asset classes as far as possible. Hedge fund managers freely pursue different investment strategies like going long of the market, procuring a security hoping that its value will increase or short selling a security which means selling a stock in order to buy it again at a lower price, in case the price declines. This flexibility of trading makes hedge funds more probable to produce positive returns in spite of the market being down. This quality makes them very popular in a bear market.

Professionals and experts define hedge fund as a privately organized investment vehicle managing a concentrated portfolio of securities and derivative instruments capable of investing both long and short, and applying leverage.

These funds differ from unit trusts because unlike unit trusts, they are not managed on a relative return basis. Due to this their investment style differs from others which may or may not be based on growth or value and hence they don�t need to invest in any particular sector like industrial or financial. This different style enables hedge funds to engage in a pro active style of management and look for various opportunities present in the market, aiming to produce absolute returns and limiting downside risk.

When hedge funds are blended with conventional long only i.e. procuring equities and bonds in the hope that the price will rise they tend to offer an alluring opportunity for diversification. These funds have the potential for consistent positive returns, low volatility and are not in much correlation with traditional asset classes, therefore enabling them in reducing the risk involved and increasing the profits.

The efficient frontier showing the range of optimal portfolios plotted along a curve with the highest expected return possible for a given amount of risk taken illustrates the quality of these funds. When these funds are included in a portfolio the efficient frontier shifts up and to the left, benefiting the investor with increased return for the same or lower levels of risk.

The nature of hedge funds is opportunistic. It offers investors new investment opportunities which are not provided by a traditional long-only investment philosophy. Moreover, these funds are now easily accessible and are gaining popularity among individual as well as institutional investors.

Although these funds are not risk free, but an investor can easily defy loses and reduce the risk profile of these funds by investing in a fund of funds. There are investment strategies including a domestic fund of hedge funds and an international fund of hedge funds which you can invest in and reap great profits.