September 29, 2006
Is Your Hedge Fund Going Bust?
The Amaranth collapse seems to have leant credence to the popular belief that hedge funds like to take big risks and can be quite volatile in nature. However, in reality, most hedge funds primarily aim to reduce volatility and risk while at the same time preserving capital. And irrespective of the market conditions, they want to consistently deliver positive returns. This is quite a tall order and hence it makes it doubly interesting to know how you can manage the volatile with the stable to ensure consistent returns.
People who don’t know much about these funds believe that hedge funds use global macro strategies and use lots of leverage to place large directional bets on stocks, currencies, bonds, commodities or gold. Sadly, the reality is not so romantic. Less than 5 percent of hedge funds can claim to be global macro funds. Most hedge funds use derivatives only for hedging or don’t use derivatives at all. And most importantly, many funds use no leverage. So to put it simply, Amaranth is only an aberration that confirms the rule.
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