What is a hedge fund in simple terms?

Hedge funds are collective funds from a variety of customers that usually come from the high-class investor. The fund manager manages the funds privately in a hedge fund company. Putting up a large minimum investment until several million US dollars.

The funds can not be withdrawn at any time but futures in accordance with the agreement. Giving flexibility to the manager (fund manager) on how to invest funds using the latest techniques.

Hedge Funds are an alternative investment platform that collects funds from various investors. And is the company will manage with a certain strategy to get multiple profits. Hedge Funds at a glance are similar to mutual funds, but there are many differences between the two.

Hedge Funds aggressively target profits by managing high-risk assets such as stocks, futures, or even derivative instruments on the international market. Each Hedge Fund is based on a specific strategy and only uses certain investment styles.

Some of the popular strategies employed by the Hedge Fund include utilizing leverage and short-selling.

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Hedge fund meaning

Hedge fund meaning is a private investment organization with a diverse and complex collection of funds. The Hedge fund companies invest or trade-in complex products, both registered and unregistered derivatives.

In simple terms, hedge funds are collective of money that take short-selling positions, buy and sell equity, conduct arbitrage, trade bonds, currencies, convertible securities, commodities, and derivative products to produce returns with lower risk.

The definition of a hedge fund itself is to protect risk against investor capital against market volatility by using alternative investments.

Investor’s Hedge fund

Investor’s Hedge fund are those from high-class individuals with a high net worth (HNI) and families, endowments, and pension funds, insurance companies, and banks.

Funds in the management of hedge funds function as private investment partnerships. Hedge funds have special treatment. Where they don’t need to register with the securities market regulator and are not subject to reporting requirements, including periodic NAV disclosures.

History of hedge fund

Based on Wikipedia’s record, the history of hedge funds begins in 1920 where many investment machines have sprung up. Of which one of the first hedge funds was Benjamin Graham who founded a partnership called Graham-Newman.

Graham-Newman is a combination of names from Benjamin Graham and Jerry Newman, who have been collaborating for a long time. Benjamin Graham is idol byWarren Buffet and himself say that Graham’s investment was the first hedge fund.

The Graham-Newman machine investment is aiming at high-end investors from people with high wealth.

In 1949 a sociologist Alfred W. Jones coined the phrase “hedge funds” by creating a structure for hedge funds. The term “hedge”, then became a general term on Wall Street to describe investment risk management due to changes in financial markets.

The 1970s, hedge funds take a single strategy with most fund managers following the long/short term equity model. However, between 1969-1970 and the 1973-1974 stock market crash many hedge funds were closed due to heavy losses.

Development after crash market

It was only since 1980 that hedge funds have received the attention of high-class investors, and during the 1990s, the number of hedge funds increased significantly.

The increase was triggered by the stock market rise of the 1990s, harmonic with interest rates, and the promise of high gain.

The next development of hedge fund strategies is to invest in other forms of investment such as credit arbitrage, distressed debt, fixed income, quantitative, and multi-strategy.

It was enough to make the interest of US institutional investors such as pension funds and endowments begin to allocate a larger portion of their portfolios to hedge funds.

Hedge fund and mutual fund similarities

The similarity between hedge funds and mutual funds is that they collect investments. They collect money from each investor and have a strategy to buy securities and assets in each fund.

Both also offer diversification with an investment model in various types of asset classes. Both also have managers who are securities fund managers in the fund. Basically, investors can choose funds in accordance with their investment philosophy.

Usually, hedge fund managers actively manage which means managers or management companies use their analytics, expertise, and knowledge to choose the securities and the time they are purchased.

Whereas Mutual Fund managers can manage actively or passively depending on their goals. If managed passively, fund managers choose assets to hold them for a long time to reach the benchmark index.

Hedge funds vs mutual funds

Some might think that Hedge funds are the same as Mutual funds, but both of them are different. Some differences in mutual funds and Hedge Funds. Here are some of them:

  • Hedge Funds include investment types that are only suitable for aggressive investors because they usually take advantage of high leverage. Meanwhile, mutual funds are suitable for investors with risk profiles ranging from conservative to aggressive.
  • Hedge Funds are only opened to investors with high wealth and require huge initial capital between hundreds of thousands to millions of US dollars. Whereas mutual funds can be opened easily by anyone with far lower capital even $100.
  • Hedge Funds include investments that are not liquid because investors are usually not allowed to withdraw funds for a long time. Withdrawal of profits or investments from the Hedge Fund is only allowed at certain intervals, such as quarterly or semester. While mutual fund investments can be withdrawn at any time.
  • Hedge Funds charge higher investment costs than mutual funds or other financial institutions. They cut commission costs for asset management, also taking a certain percentage of profit in return for performance.
  • Hedge Funds can choose more investment asset classes than mutual funds, ranging from real estate, stocks, forex trading, and various derivative assets. This is very different from mutual funds which only have a limited choice between stocks, bonds, or other investment assets that are lower risk.

In general, it can be concluded that the Hedge Fund strives to pursue profit as high as possible. Whereas mutual funds are more oriented to risk control.

Hedge fund vs mutual fund performance

The performance of hedge funds extracts the maximum possible benefits from huge investments made by top-class investors. These investors want to get the maximum benefit possible but they are ready to absorb equal risks.

Mutual Fund performance is targeted at retail investors. That avoids high risk but would prefer their money to grow at a constant pace over a long period of time.

Taking into account the two things above which have different rules and structure disclosures. It all depends on the investment objectives of investors and the amount of risk they are prepared to absorb.

The performance of hedge funds gives higher yields compared to risk. While mutual funds provide lower yields with lower risks.

Hedge funds for small investors

Hedge funds pursue high profits by taking high risks, is it possible for small investors to invest in hedge funds? Because hedge fund investments are very high for small investors to take part in hedge funds, it is very unlikely that small investors will deposit a minimum of $ 100,000 or even $ 1 million in funds.

But some mutual funds make a replica of what they call a fund of funds to replicate the hedge fund strategy, this acts outside of the hedge fund and mutual fund.

Hedge fund companies

There are many hedge fund companies around the world with hundreds of them. Most of these companies are established and operate in the US and Europe. These are some of the Hegde fund companies which are the top 10 companies:

Bridgewater associates.

This hedge fund company is the largest in the world based in Westport, Connecticut.

Has a total fund of more than $ 130 billion in hedge fund assets, and AUM total of $ 150 billion in February 2020.

Bridgewater Associates is a company founded by Ray Dalio, in 1975. They have a global institutional investor consisting of pension funds, charities, endowment funds for universities, and central banks.

Renaissance Technology.

This hedge fund company is based in New York and was discovered in 1982 by James Simons, but is currently run by Peter Brown. Renaissance Technologies has around 600 employees and controls about $ 68 billion in AUM.

Man group

This hedge fund company is based in the UK. Although the company having offices in London, Man Group holds offices in various world hubs, including Boston, Tokyo, New York, and Hong Kong.

This hedge fund offers around $ 62 billion of AUM hedge funds in June 2019 with an overall market capitalization of $ 2.85 billion in January 2020.

AQR Capital Management

This hedge fund company was launched in 1998 by David Kabiller, Robert Krail, John Liew, and Cliff Asness. It has around 1,000 employees operating in Boston, London, Chicago, Greenwich Tokyo, Hong Kong, and Los Angeles and in Frankfurt, Germany.

The company manages more than $ 61 billion of AUM hedge funds, AQR’s total assets exceeded $ 185 billion in September 2019.

Two Sigma Investments

This Hedge fund company is again from America. Based in New York, it was launched in 2001 by Mark Pickard, David Siegel, and John Overdeck. But it also has offices in Hong Kong, Japan, and the United Kingdom.

This hedge fund company uses scientific methods to invest quantitatively $ 43 billion in AUM.

Millennium Management

This hedge fund company was launched in 1989, in America. Based in New York and has offices in Geneva, Tokyo, Hong Kong, Singapore, London, and Greenwich.

This global hedge fund firm offers the preferred investment consulting service for private funds with AUM $ 40 billion in December 2019. There are more than 2,700 people as the company employs.

Elliott Management

This Hedge fund company is again from America. Launched in 1977 by billionaire Paul Singer. Based in New York, the company has offices in Hong Kong, Tokyo, and the United Kingdom. Manage funds of around $ 38 billion at AUM in June 2019.

This hedge fund company invests in public equity, distressed securities, fixed income investments, alternative investment markets, and real estate-related securities.

The company has 465 employees, who once announced plans to acquire retail bookseller giant Barnes & Noble Inc., in June 2019.

Black Rock

Again, a New York-based Hedge fund company that has total assets exceeding $ 7.4 trillion.

With AUM hedging funds of 33 billion. BlackRock shares are traded on the New York Stock Exchange (NYSE) under the ticker symbol BLK.

Citadel

The Chicago-based company was founded by billionaire Kenneth Griffin in 1990, with an investment capital of $ 32 billion as of September 2019.

The company’s strategy relies on quantitative analysis to investing in credit, fixed income, commodities, and equity. The company has more than 1,600 people in all offices in San Francisco, Boston, Shenzhen, New York, Houston, Dallas, Hong Kong, Toronto, London, and Shanghai.

Davidson Kempner Capital

This hedge fund company was founded by Marvin Davidson in 1983. The company offers nearly $ 31 billion in AUM, focusing on bankruptcy, convertible arbitration, merger arbitration, distressed investment, event-driven equity, and restructuring situations.

The company has 350 employees in offices operating in London, New York, Dublin, and Hong Kong.

Final thought

Hedge funds are private companies that provide or offer high returns by taking high risks. Because they have large funds, sometimes what they do can affect the price movement of an asset.

For example, George Soros caused the sterling currency to depreciate very high. They rarely do long-term trading and often do for the short term, so when the news is the high impact it’s good for forex traders to pay attention to this.

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