Hedge funds are a highly sophisticated investment avenue. They encompass an expansive array of trading strategies across distinctive asset classes and markets. Hedge funds make use of diverse types techniques, including short selling, to mitigate market risks. They aim for positive returns, no matter the market trends. As Scott Tominaga mentions, hedge funds are particularly suitable for investors who are experienced and well-informed.
Scott Tominaga underlines a few important features of hedge funds
Hedge funds are among the most popular types of alternative investments today. They are particularly well-suited for high-net-worth individuals and institutions. Hedge fund managers typically invest in a variety of markets, like commodities, bonds and stocks. They also tend to employ complex strategies, like taking short and long positions with the aim of capturing price inefficiencies across investment products and geographies.
Institutions and wealthy individuals invest in hedge funds with the goal of making higher returns in comparison to what they may enjoy public stock and bond markets. In certain ways, hedge funds are similar to mutual funds. Both of them are investment vehicles that pool money and are run by professional managers. However mutual funds are heavily regulated by the SEC or Securities and Exchange Commission. On the other hand, hedge funds are allowed to pursue riskier strategies and investments, which increases the odds of enjoying higher returns.
Hedge funds get their name due to the fact that they seek to “hedge,” or lower overall portfolio risk, by investing in ways that are not correlated with a traditional stock-and-bond portfolio. Here are some of the important features of hedge funds:
- Enhanced returns: Incorporating hedge funds into the portfolio may refine its risk-return dynamics due to its ability to capitalise on both upward and downward market trends. This is done by employing strategies like short selling. The versatility of hedge funds allows it to provide unique return opportunities that are not typically available through traditional investments
- Portfolio diversification: Hedge funds can introduce a more expansive spectrum of investment strategies to a traditional portfolio, and inject a layer of diversified returns. The active management approach favoured by hedge funds can especially be beneficial in scenarios of rising interest rates owing to their ability to exploit market volatilities.
- Lock-up periods: Hedge funds are generally less liquid than mutual funds or ETFs. Many hedge funds have lock-up periods, where investors are required to keep their money in the fund for a specified period, often ranging from one to three years. This feature allows hedge fund managers to pursue long-term strategies without worrying about frequent withdrawals disrupting their investments.
- Adapt to various market conditions: Hedge funds can manage the ups and downs of the market cycles, and even profit in falling or rising market conditions by efficiently employing long-short strategies. Such strategies can offer potential downside protection against market crashes as well as have the capacity to demonstrate improved performances during market downturns.
In the opinion of Scott Tominaga, due to their flexible investment rules, as well as a wide range of investment tools and strategies, hedge funds generally have a low correlation to traditional assets. They usually provide returns regardless of market movements, thereby ensuring lower volatility of the overall portfolio.