February 15, 2007
Hedge Funds: The Story
Interested in the hedge fund phenomenon but don’t know enough about it. Doesn’t matter. Here’s a simple and easy lowdown on what a hedge fund is about.
Just think of a hedge fund as a dolled-up, sexier version of your staid and dumpy mutual funds. They have that element of secrecy, a little danger and dallying with the authorities to make them even more enticing. Largely unregulated, hedge funds pursue investment strategies that are out of bounds to run-of-the-mill mutual funds.
And how do they make their money? Simple. They stick to their basic aim of trying to make money in all market conditions. For the supposedly great returns they provide, hedge fund managers do charge a hefty sum. The manager typically takes 20 percent of the profits, plus 2 percent for expenses.
It’s not all smooth sailing sans any rules whatsoever. You have to contend with the ‘lock-in’ period. Since your hedge fund manager has to follow complex strategies, he needs to be assured that you will not pull out your money and walk away anytime you wish. You have to lock in your money for a certain period – usually 12 months. Some funds ask for a two- or three-year lock in as well.
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Although there is no universally accepted definition of the term "Hedge Fund", the term has evolved over time to include a multitude of skill-based investment strategies with a broad range of risk and return objectives. The common element among these strategies is the use of investment and risk management skills to seek positive returns regardless of market direction.
"Hedge Funds" use a wide variety of investment styles and strategies. Even among "Hedge Funds" that purport to use the same investment strategy or invest within the same asset class, there is a wide range of investment activities, performance and risk levels. Because the investment activities of hedge funds are so diverse, the hedge funds assigned to a particular investment category are likely to exhibit less similarity than more traditional investment vehicles, such as registered investment companies.
Posted by: Shailendra Dubey | Mar 11, 2007 10:58:25 PM
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