Hedge funds
Hedge funds are probably one of the least understood and the most controversial phenomenon in the world of investment. The mystery shrouded in and around hedge funds industry lies in the nature of the industry itself. It is as a company policy that the investment managers who are into hedge funds are not able to disclose the investment strategies that they use and what they generally do with the money. While the hedge funds are known for making some of the major investments in a wide range of sectors, the strategies itself are extremely modern and sophisticated. Most of the hedge funds are run by investment managers, who have an excellent know how of the same. Moreover, these managers are known for charging a hefty fee from their clients.
The clients of most of the hedge funds are in fact known for being wealthy individuals or investors. Hedge funds are thus not open to the general public, though the target is now shifting to more and more of institutional clients.
Hedge funds are known for having a flexible range of investment strategies, with most of the investments being based on security selections. This means that the investments are highly secured, irrespective of the market risk involved. Focusing on stock specific returns, the losses incurred in a hedge fund is much lesser than those incurred in mutual funds, for instance. Another way of reducing any form of market risk is by making investments in derivatives, with some of them being long and short positions of the different stocks. At the same time, unlike mutual funds, hedge funds select their portfolios very carefully. Thus, instead of diversifying their portfolio, like it is done in mutual funds, that is, the sectors chosen for investment, hedge funds chose to specialize in few sectors only. Portfolio management is one of the major ways in which they have a stronghold in the market. It is the careful selection of the companies and the performance of these stocks in the market. Besides collecting money from the investors, hedge funds also borrow a certain percentage of their investment. This enables them to get higher investment returns.
One of the controversies of hedge funds is the fact that there has been a spurt in the growth of hedge funds worldwide. The hedge fund industry is today net worth of $2 trillion, with the amount of investment made in hedge funds having increasing almost ten fold in less than a decade. Today there are more than 9000 hedge funds ruling the market. But while there have been an unprecedented growth of hedge funds, there has been increasing debate on whether these should fall under some regulation. This is because unlike the other forms of investment, hedge funds do not fall under any such authority. Today, as much as one third of the stock market in London Stock Exchange falls under the category of hedge funds, while about one fifth of the stocks are actually hedge funds.