Hedge funds are an alternative investment method. It is a form of investment in which funds are pooled and invested using different investment strategies to generate profits in a financial partnership between the fund manager and investors.

The fund manager is known as the general partner and investors are known as limited partners. The role of limited partners is the investment of funds and that of the general partner manages them. Investors receive a hedging prospectus that provides information on key aspects of the fund, such as the fund’s investment strategy, investment type, and leverage limit.

As the name implies, hedge funds work in a way to ‘hedge’ or avoid risk. So we see that the goal of hedge funds is to maximize profits along with minimizing risk. They are intended to generate profits regardless of market fluctuations. They minimize risk by offering investors to buy long or short stocks. Shorting involves making money when stocks fall.

An investment manager manages the funds through a company other than the hedge fund and its portfolio of assets. The investment manager uses the support of the following service providers:

Main corridors

They help offset trade, provide leverage and short-term financing.

Administrators

They provide operations, accounting and valuation services.

Dealers

They basically deal with the distribution of values. A dealer can be an insurer, a dealer, or a broker.

The investment strategies adopted can be classified into:

• Discretionary / Qualitative: These are strategies selected by the general partner or fund manager.

• Systematic / Quantitative: These are strategies suggested by a computerized system.

Hedge fund features:

• Available only to accredited investors

Investors must have a certain net worth before investing in hedge funds.

• Variety of investment options

You can invest in various areas such as land, real estate, stocks, derivatives, currencies, etc.

• Use leverage

Borrowed money is often used to improve profitability.

• Fairy

They charge a management fee and a performance fee.

The main benefit of investing in hedge funds is that the risk is lower than other types of investments. It can be said that they are not correlated with market indices. However, the fact is that they are prone to some risk. Therefore, it is a good approach to be aware of all potential risks before investing. Selecting a fund manager with experience in the field is also essential.