HEDGE FUNDS

HEDGE FUNDS

Hedge funds have been in the news in recent times, as their numbers have grown significantly along with the assets under management. This is now estimated to be a $ 1.1 trillion industry. The large bonuses and earnings that the hedge fund managers take home have caught the attention of people across the world. The word fund seems to suggest that they are in the same category as mutual funds but there is quite a bit of difference between these two entities.

The concept of pooling together of money of people is a common factor across both hedge funds and mutual funds along with the fact that there are specialist or professional fund managers to manage this money. However after that there is a lot of difference in the entire working process of these two types of funds.

Hedge funds are those entities where there are a small number of investor’s usually high net worth people who have contributed large sums of money to the fund. All hedge funds are not the same and hence it is important to look at their investment strategies. They use a variety of investment strategies like aggressive growth, market neutral, distressed securities, emerging markets, market timing etc. Here the emphasis is on following the strategy and earning an absolute return and hence there is a large amount of freedom in the way and the manner in which the fund manager can invest the fund. In a mutual fund the primary aim of the fund manager is to beat the benchmark and outperform the market. Most hedge funds are specialized and their strategies will work only with a certain amount of funds due to which there is often a limit on the size of the funds that they use.

Due to this factor of the fund itself these are often short term players in the various markets across the world as for them being quick off the mark is a very important component in earning the required return. These hedge funds work across a wide area of markets where they often go short on various assets in order to achieve their aims.

Hedge funds also take up large positions in the derivatives market plus they use a large number of instruments that might often be not permitted for use by the mutual funds in their investment process. There is also very little control over the hedge funds because many believe that unlike mutual funds where there is money of small investors whose interests have to be protected the investors in hedge funds know exactly what they are doing and hence they do not need any special kind of protection. Thus strict guidelines with respect to operation of these entities are not present like in the case of mutual funds.