Hedge funds: tell me more...

Absolute return funds, commonly known as hedge funds, are one of the fastest growing types of investment in the world today. Curious? Want to get on the bandwagon? Read on…

What is a hedge fund?

A hedge fund is a type of managed investment fund that has as it’s goal producing returns for the investor in rising markets as well as falling markets, using a broad range of securities and investment techniques.

Depending on the type of investment strategy used, returns may be in the form of income or capital appreciation (sometimes they can be both), while the risk profile for the investment can vary from negligible (“conservative”) all the way to aggressive. In short – there’s something for everyone.

How do hedge funds work?

Where traditional fund managers may use what is known as a “buy-and-hold” approach, hedge fund managers use more advanced strategies to exploit market opportunities, with underlying securities being anything from shares and bonds to real estate, options or futures.

Benefits?

If you want to know more about the pros and cons here are a few points to note:

• Returns – Positive investment returns can be achieved no matter what the market is up to. Positive ongoing returns are the name of the game, meaning investments with low volatility are generally selected. Furthermore, rises in capital prices of the fund and the income that investors receive as dividends both deliver returns to the investor.

• Risk – The kind of investment methods used with hedge funds means volatility is reduced, as the returns are not correlated to assets like shares or property. Hedge funds have similar volatility levels to bonds, but generally have better returns.

• Liquidity – Stockbrokers or planners can buy and sell on the Australian Stock Exchange at any time, just as with shares. Information on your investment is easily available in the press and online, and transactions are settled within three days. (If you were selling a house it might take weeks or even months).

Two types of hedge fund

• Single Strategy – Securities are invested indirectly, using a given investment strategy.
• “Fund of Fund” – The fund in use invests in various other hedge funds.

Tell me more…

In the world of investing, the landscape can change rapidly. The best place to look for up-to-date information about funds and shares in general are the Australian Stock Exchange (ASX) website and the major daily papers. The Internet also offers access to additional information such as international papers (The New York Times) and major news providers. Almost as soon as it has happened you’ll be find a snippet about it on the Web.

For general resources about what a hedge fund is and so forth a booklet by the Alternative Investment Management Association can also be found on the ASX website. For some great tips for beginners, you could also take a look at Hedge Funds for Dummies by Ann C Logue, available through Wiley Publishers. Disquiet in August 2007 on the topic of hedge funds in the US is nicely summarised by The Age in their article about hedge fund collapse and is also worth a read.