What is a Hedge Fund?
A hedge fund is a specialized investment fund that operates with more flexible investment rules than traditional equity or fixed income funds. The primary objective of a hedge fund is to deliver positive returns regardless of overall market conditions.
Investing in funds involves risk.
How Hedge Funds Work
The term “hedge” refers to protection. A hedge fund’s strategy is designed to protect your portfolio and mitigate the risk of severe losses during market downturns. The goal is to achieve an absolute return (positive growth) whether the broader stock market is rising or falling.
Because hedge funds are classified as special funds, managers are not restricted to traditional long-only strategies. They can use derivatives, short selling, and leverage. This flexibility means that the fund’s performance depends heavily on the skill and specific strategy of the fund manager, rather than just general market movements.
Risk Profile
While “hedging” implies protection, the tools used to achieve it can introduce different types of risk. Some hedge funds operate with very high risk to maximize returns, while others employ low-risk, market-neutral strategies. It is critical to review the specific risk profile of a hedge fund before investing.
Who Are Hedge Funds Suitable For?
Hedge funds are best used as a complement to a diversified portfolio. Because they often have low correlation with traditional equity markets, they can help reduce overall portfolio volatility while providing an alternative source of returns.
You should not build a portfolio consisting entirely of hedge funds. Instead, use them strategically to balance risk across your broader investments.
Important Information
Past performance is not a guarantee of future returns. The value of fund units can both increase and decrease, and it is not certain that you will recover the full amount invested.
