A highly speculative investment with high returns and very high risk – this reputation precedes hedge funds. Especially in the course of the 2008 financial crisis, hedge funds became known worldwide through negative headlines. Because during the crisis, hedge fund investors recorded large losses. To this date, there are still investors who consider investing in hedge funds through experienced brokers like Traders with Edge. Fund managers can take care of your investment through proven strategies.
What are hedge funds?
Hedge funds are alternative, actively managed investment funds that are traded off the stock exchange. With hedge funds, investors aim to generate maximum returns. To do this, high risks are often taken.
Since not all hedge funds can be committed to a specific strategy, investments range from stocks and bonds to speculative trades with short sales using leverage.
The term hedge fund can be derived from the British “to hedge”, which means something like secure. At first glance, however, hedge funds have little to do with security, because they sometimes pursue very risky investment strategies and have hardly any restrictions. Nevertheless, investors also use their strategies to specifically counteract individual risks in their portfolios.
The term can also be assigned to the hedging strategy. This is an investment strategy to secure investments, e.g. B. on the stock market, whereby a counter position is taken with derivatives such as futures and options. In this way, losses in the stock market can be absorbed in turbulent times.
Hedge funds are often referred to as “super-rich investment funds” because the minimum investment volume for most hedge funds is EUR 500,000 or more. Accordingly, a very high income is required to be able to participate as an investor.
How do hedge funds work?
In terms of the basic principle, hedge funds work in a similar way to classic investment funds. The fund manager invests the investors’ money in different assets and tries to achieve the highest possible return for the investors. In contrast to classic investment funds, however, the asset classes of hedge funds are not restricted. That means the fund manager can’t just invest in stocks, but also invest in derivatives. Since there is no uniform regulation for the use of capital, hedge funds do not follow a specific strategy, but there are a variety of investment strategies.
The risk of investing in hedge funds
Hedge funds are known as a type of fund with the chance of particularly high returns. However, the high profit comes with very high risks. Because while the return on classic funds depends on positive market developments, hedge funds can also speculate on falling prices independently of this. This means that ongoing profits can be achieved, provided the manager of the fund is right in his speculation. Investing in hedge funds can therefore be very profitable, but also lead to high losses just as quickly.
A quick look at the cost for hedge funds
- Fees for the fund manager: As with other actively managed funds, the hedge fund manager also receives fees for his work. These are due for both single hedge funds and umbrella hedge funds.
- Management costs: Investors have to pay fees for the management of the fund’s assets.
- Custody fees: The purchase and sale of shares in umbrella hedge funds are processed through a custody account. Private investors may have to expect a deposit fee at the respective bank.
- Performance Fees: Many hedge funds charge a performance fee when the fund makes a profit. These fees provide an incentive for fund managers, as they earn additional commissions when they make profits.
Sensible alternatives to hedge funds
By definition, hedge funds belong to the category of alternative investment funds. Due to the speculative investment strategies, they are characterized by a high level of risk and are therefore more suitable for professional investors than for private investors.
Instead of investing in extremely high-risk types of funds, as is the case with hedge funds, individual investors can also invest in the stock market with lower risks. This is e.g. B. possible with investing in ETFs. Index funds are not only more cost-efficient, but investors can also align their investments with their personal risk tolerance.