Hedge Funds Utilize Complex Strategies to Deliver Positive Returns

by John Stevenson on February 8, 2014

Hedge funds are investment vehicles that aim to deliver returns. Funds fall in different categories, depending on factors such as the leverage limit and investment types and styles. The goal is to deliver stable returns and reduce manager risk. Speaking of regulations, SEC hedge fund rules vary in the EU, U.S., and other locations.

Strategies Used

money_graph1Some funds specialize in bonds and stocks while others utilize risky and advanced strategies. Some funds focus on businesses involved in lawsuits and others specialize in fixed income securities. Hedge funds use mathematical models and various sub-strategies, with different types operating around the world . While some funds have diversified portfolios, others focus on specific markets and sectors. Different funds utilize various techniques, including statistical and convertible arbitrage. There are funds that focus on security repurchases, share buy-backs, and spin-offs. Hedge funds focus on stocks and differences in prices and use both fundamental and mathematical models. There are alternative techniques as well, including 130-30 funds.

Hedge funds aim to deliver positive returns and take different factors into account, including leverage, concentration, capacity, and valuation risk. Fund managers also invest in debt or bonds of companies that experience financial problems or face bankruptcy. The strategies they use vary depending on market conditions (bear or bull market). Fund managers use different methods, including macro and multi strategies, to outperform unit trusts, mutual funds, and stock portfolios. The expected volatility is one factor that plays a role. There are funds that trade derivatives and options. Some of them also invest in debt and equity of emerging markets to profit from fluctuations, shifts, and volatile growth. The economies of Turkey, South Korea, and Mexico are emerging markets.

 Other Options

Hedge funds vary widely when it comes to risk, volatility, and returns. Aggressive growth strategies focus on micro-cap stocks in different sectors, including biotechnology, banking, and new technologies. Investors choose from different instruments, depending on their risk profile. Some funds use leverage and derivatives while others capitalize on market opportunities as they arise.

Industry Regulations

Regulations vary depending on the location, but there are similarities as well. Hedge funds are usually less regulated than other investment vehicles. Different EU countries impose limits on leverage and various controls. The situation is similar in the U.S. where administrators register with the Securities and Exchange Commission. Hedge fund rules vary in locations such as Luxemburg, Dublin, and the Cayman Islands.

Structure and Management

Managers are tasked with valuation, accounting, and operations. Managers invest in different asset classes to enhance returns. Capital preservation and return on investment are the main objectives.

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