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getting a grip on hedge fund investments


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Actually defining what hedge fund means can be extremely difficult to do. This is because in a lot of cases where hedge funds have been set up no hedging techniques have been used. What instead happens is that those who control the hedge fund employ a number of different strategies or techniques in order to make a profit for those who choose to invest in such funds.

In the majority of cases, most hedge funds will be structured as a partnership. There will be a general partner and it is they who will manage the portfolio for the rest of the partners who have invested in it. The main role of the general partner is to make the decisions with regards to the hedge fund investing that is carried out. Whilst the rest of the partners are those who actually provide the money for the general partner to invest, the manager will typically have his own money also invested.

The manager of the hedge fund is required to produce targeted returns or an absolute performance in relation to the portfolio no matter what is happening in relation to the rest of the financial market. These are people who will use a number of different strategies in order to achieve their goals and to ensure that they make the soundest investments possible for the funds investors. Some look at using equity, fixed-income or CTA portfolio strategies, whilst others prefer to use mathematical algorithms in order to get the right returns.

As with all kinds of investment, hedge fund managers are subject to the same rules and regulations of the market as any other trader is. However, the strategies that hedge fund managers use are not so easily available to those who manage regulated entities including mutual funds.

For a manager of a hedge fund to see any kind of absolute return on the investments that they make they need to be flexible. This is one of the reasons why they will incorporate or use different investment strategies or techniques in order to achieve their goals. Below we look at some of the kinds of techniques that these kinds of fund managers will employ.

1. Short Selling - A hedge fund manager will select to sell a security that they do not actually own in order for them to then purchase it back at a later time for a price less than what it was originally sold for. If they do this properly, they could end up making a considerable profit on the initial investment that they made.

2. Arbitrage - With this particular technique, the hedge fund manager will buy and sell the same investment to a number of different markets at the same time. When carried out correctly the manager of the fund that they have made a reasonable amount of profit because of the difference between the prices that they brought and sold the investment for.

As well as the two hedge fund techniques mentioned above that can be utilized in this kind of investment there are also hedging and leveraging as well. With hedging, the manager of the fund will buy or sell a security so that they can use the funds to help offset against any potential loss the investment may otherwise have made. As for leveraging, this is used when the manager has to borrow money in order for them to invest in a particular financial product.
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