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Investors are always looking for the
best investments that will yield the most profit. Any
investor who can afford the extra cost should consider
investing in Hedge Funds. Hedge Funds were started in
1949 by Alfred Winslow Jones, who pioneered
non-traditional investment strategies. Jones innovated
this new investment strategy by selling short stocks,
while buying other stocks (long stocks). Hedge Funds
are very similar to Mutual Funds, except that there
are fewer regulations on Hedge Funds. As a result,
Hedge Funds usually require a much larger investment.
What Are Hedge Funds?
Hedge Funds can help investors make more money with
higher-risk investments. Other techniques used in
Hedge Funds include “leverage,” which is borrowed
money to trade in addition to the capital provided
one’s investors. The usage of Hedge Funds also
requires an incentive fee. An incentive fee is a fee
based on a portion of the client’s profits as
opposed to a fixed percentage of assets. This fee is
then invested and ideally will gain the investor more
money.
Generally, companies are the owners of Hedge Funds
because most people do not have enough money to meet
the minimum investment required to have a Hedge Fund.
In 2004, Hedge Fund investments passed the $1 trillion
dollar mark. In mid-2004 about 39 companies shared the
total Hedge Fund values of 1.1 trillion dollars.
Common Techniques for Investing
There are also other techniques for investing with
Hedge Funds. One way is to invest in a company just
before a major merger. If one gains knowledge of a
merger, and buys large amounts of share in a company
that is about to merge, the shares go up greatly once
the merger occurs. This is, unfortunately, a very
high-risk investment strategy because some mergers may
not occur.
Other techniques include selling short, which is where
one invests in seemingly undervalued securities,
trading commodity and FX contracts, and taking
advantage of the separation between the current market
price and the highest purchase price in events such as
mergers.
Why are Hedge Funds Beneficial?
Hedge Funds are also beneficial because of their high
level of security. Hedge Funds are private, between
individuals, and do not have to be made known to the
government or other companies. Currently, Hedge Funds
do not need to be registered with the SEC. Hedge Funds
are also based in places with less regulations (I.E.
The Cayman Islands, The Virgin Islands, etc). However,
one drawback of Hedge Fund security is the fact that
it looks suspicious to have secretive investments. For
this reason, many companies and investors are
criticized for being involved with Hedge Funds.
Conclusion
Hedge Funds are a very risky investment, with a large
payoff. In order to invest in Hedge Funds, one must be
prepared to make a very large investment. Hedge Funds
are similar to Mutual Funds, except there are less
regulations on Hedge Funds. Less regulations lead many
people to be suspicious of investors who invest in
Hedge Funds. However, if one is willing to take the
risk, Hedge Funds can certainly pay off!
By www.fundstreet.org
Scott Hillsworth enjoys writing about financial
topics. Learn more at Hedge Funds Street (
http://www.fundstreet.org/arbitrage/ ), a weblog with
daily hedge funds research and news.
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