What is a Hedgefund?

What is a Hedgefund?

Blog Date: 11/26/11

Author: Daniel Soares, Finance/Management Major

The mere thought of the word gets investors salivating. Why do these funds differentiate themselves from other investment portfolios? And, why are some of the richest money managers on the street hedge fund managers? Well, I would like to take the task of simplifying the cash cow investment known as a hedge fund.

Hedge funds are unlike mutual funds and retirement funds in that they can undertake a broad range of investment and trading activities, and invest in a diverse range of assets, including equities, bonds and commodities. With the ability to diversify its investments, hedge funds obtain the possibility of performing exponentially better in return on investment. To really understand hedge funds, it is essential to classify them according to the investment strategies they use. There are a few other strategies that can be used but the following three are most common:

1.Long/short equity
2.Short-selling
3.Event Driven

Long/short equity is a portfolio that contains a long position (buying) in undervalued shares, and a short position (selling) in overvalued shares.

Short selling consists of selling shares in companies with precise problems, or dumping shares because of the "market sentiment". In other words, it means betting on falling markets or securities.

Lastly, the event-driven strategies are fixated on certain events, which can accumulate an increase in the price of the stock. These hedge funds buy, after an announcement of lets say a merger, the shares of the company that is being acquired, and sell shares of those of the purchaser. These are all a variety of ways in which hedge funds invest their money.

Hedge funds have a "V.I.P." guest list of investors who are invited to their party, so to speak. These investors can be institutions, such as pension funds, university endowments and foundations, or high net worth individuals. An accredited investor will have one of three situations:

1. Net worth that is greater than $1 million.

2. Income for two years that has exceeded $200,000.

3. $5 million in assets

A qualified purchaser will be:

1. Someone who holds more than $5 million in investments

2."A family-owned'' business that has $5 million in investments or more

3. A business that holds $25 million in investments.

These list of credentials exemplify just how exclusive hedge funds are. Hedge funds as of late perform better then most investment portfolios. As of 2009, hedge funds represent 1.1% of the total funds and assets held by financial institutions. The estimated size of the global hedge fund industry is $1.9 trillion. The top 5 hedge fund managers are worth an estimated $112 billion.

Hedge funds are a great way to make a lot of money fast. But in order to do so you must be extremely quantitative and have a strong stomach. Hedge funds can get excruciatingly volatile and definitely carry great risk. With that being said, I feel hedge funds are your best bet on landing yourself on the Forbes top 100 list.