Hedge Funds Getting Bad Rap

Hedge Funds are being blamed for the automotive difficulties. This is ridiculous , as they are merely investors, just like any common shareholder would be. Sure, they might be "short" the stock, or hold more complex instruments than the average investor, but they should not be vilified for trying to make a profit from their stake.

After all, many "ordinary" investors have access to hedge funds, and may not know it. This could be thru an endowment, pension plan, or even some mutual funds.

Hedge Funds - Market Neutral

Market Neutral - A hedge fund strategy undertaken by an investor or an investment manager which seeks to profit from both increasing and decreasing prices in a single or numerous markets. Market-neutral hedge fund strategies are often attained by taking matching long and short positions in different stocks to increase the return from making good stock selections and decreasing the return from broad market movements. Market neutral hedge fund strategists may also use other tools such as merger arbitrage, shorting sectors, and so on. There is no single accepted method of employing a market-neutral strategy. These strategies had a decent 2008 since the broad equity market experienced such dramatic losses.

Hedge Funds - Convertible Arbitrage

Convertible Arbitrage - This hedge fund strategy primarily involves taking long positions in convertible bonds hedged with a short position, typically in the underlying stock. Convertible bonds and warrants are priced as a function of the price of the underlying stock, expected future volatility of returns, risk-free rates and the issuer-specific corporate yield spread. However, in many cases, convertible bonds and warrants are not accurately priced due to illiquidity in the convertible and warrant markets compared to the markets in the underlying common equity of the stocks, uncertainty concerning the call and redemption features of convertible securities and lesser focus on these derivatives as opposed to the equities into which they are convertible or exercisable. These mispricings may lead to significant profit opportunities for hedge funds, as positions are acquired in anticipation of the market price eventually reflecting true value. Historically, this strategy has been one of the best hedge fund approaches in terms of Sharpe Ratio.

Who Needs Hedge Funds

With all the negative publicity concerning Hedge Funds lately, I wonder why anyone would even want a part of these investments. A decent Investment Advisor will often offer investment products that are totally transparent (unlike Hedge Funds), no incentive fees, and great return potential.

Hedge funds have a significant failure rate. Some strategies, such as had an attrition rate as high as 15% per year between 1994 and 2003, according to a study. It cannot be denied that failure is an understandable part of the process speculative financial investments, but when large, popular funds close, there is a lesson for investors somewhere in the debacle. When you see Hedge Fund returns in the Wall Street Journal, or other financial publications, they omit the funds that have gone out of business. This, of course, inflates the actual investment return of these funds.

What is A Hedge Fund?

A Hedge Fund is an often aggressive portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns either in an absolute sense or over a specified market benchmark.

Hedge funds are typically open only to a limited range of professional or wealthy investors. This provides them with an exemption in many jurisdictions from regulations governing short selling, derivative contracts, and use of leverage. A hedge fund will typically align itself to a particular investment strategy, investment types and leverage levels via statements in its offering documentation, thereby giving investors some indication of the nature of the fund.

Hedge Fund Investing

Welcome to Hedge Fund Investing. We will be covering all aspects of Hedge Funds from the legal issues to the investments involved. All types of Hedge Funds will be discussed: Short Funds, Macro Funds, Long/Short Funds, Arbitrage, Market Neutral and others.

Hedge Funds cannot be used in typical Retirement Plans like 401(k) Plans, 529 Plans, or 403(b) accounts. They are generally held in "Separate Accounts" for accredited investors only. In addition, Hedge Funds are not stocks, ETFs, mutual funds, or annuities, though they can be invested in one or more of those vehicles.

There is a lot of confusion in the Hedge Fund industry, and we will try to take the mystery out of the concept. Hedge Funds are not for everybody, but it is in your best interest to at least be educated on the basics of Hedge Funds. I found a great news site for financial news investment headlines.

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More to come.....