Beginners guide to Hedge Fund Investment Strategy

Since the 21st century uses of the Hedge fund in a financial portfolio has increased histrionically. It's like a partnership investment that named as a Hedge fund. It allows investors to invest aggressively in a wide variety of financial instruments than most mutual funds. Below we will provide you with the basic idea of a Hedge Fund and how can you invest with it. 

04 December 2020 | AtoZ MarketsIn 1949, A.W. Jones & Co. started the world's first Hedge Fund, which is own by Former writer and sociologist Alfred Winslow Jones. While writing an article on "Investment Trends" in 1948, Alfred got an idea to try his hand on managing other's money. He has raised $100,000 and added more $40,000 from his wallet and invested it by minimizing the risk in holding the long-term stock trades while short-selling other stocks.

This system is currently known as the long or short assets model. Alfred Winslow also exaggerated his returns by taking leverage. In 1952, he innovated his investment structure and converted it from an average fellowship to a moderated fellowship. He also added a 20% stimulant fee as restitution for the investment partner. Alfred Winslow Jones has achieved his position in investing history as a father of the Hedge Fund.

What Is Hedge Fund?

Hedge Fund uses the money of an investor to generate active returns for its investors by applying different strategies. They manage fund very aggressively and uses high leverage in the domestic and international marketplace for high outcomes. Moreover, Hedge funds need less SEC regulations than other funds as they're only approachable to entrusted investors. Besides, they require less regulation than mutual funds and other investment sources.

Fellowship of Hedge Fund

A Hedge Fund works to maximize investor's outcomes and extract hazards. Their formation sounds more like mutual funds, but they work more aggressively than mutual funds. In the Hedge Fund, qualified investors contribute funding for the security, and the general partner manages funds by following their strategy. Also, fund managers allowed to accomplish the trading methods that Hedge fund provides. The method is to make money whether the asset is going up or down. A manager can take both steps by going long or shorting the assets. Though Hedging methods aimed to minimize risk, most hedge funds consider their drills for bearing high risks.

Furthermore, in the 1990s, the Hedge Funds industry has strike higher, when the high profile money managers influence the mutual fund industry to live a luxurious life as a Hedge fund manager. Since then, the industry raised gradually with a total valued of more than $3.25 trillion assets under management, according to the Preqin Global Hedge Fund report of 2019.

Structure of the Hedge Fund

Hedge Funds are typically obtainable for qualified investors. These investors have a net worth of around $1 million or have an annual income of $200,000. Besides, fund managers follow the structure of two and twenty, while the manager takes 2% of assets and 20% of the commission on the profit each year. The portfolio managers always get 2% of the asset, even if they lose money. As like, if the manager is managing a $1 billion fund could gain $20 million a year in indemnity, without earning a penny.

Types of Hedge Funds

Hedge Funds can explore a variety of strategies including macro, equity, relative value, activism, and securities. A macro Hedge Fund invests based on interest rates and economic policies of the country. They mainly invest in stocks, bonds, and currencies to hoping a profit based on macroeconomic. Besides, an equity Hedge Fund can be based on global or country-specific. They invest mostly in eye-catching stocks while hedging against the downtrends in the stock market by selling overbought stocks. They take advantage of price or spreads incompetence. Other follows aggressive growth, income, and short selling.

Hedge Funds Strategies

The most popular Hedge Funds strategies provided below:

Equity Long/Short

By absorbing profit scopes in both upward and downward awaited price moves equity Long/Short works. The strategy holds long status in stocks recognize as being comparatively low priced while selling short stocks that considered to be high priced.

Equity Market Impartial

When the managers try to imbibe disparity in stock prices by being long and short in the same quantity of intimately engaged stocks, the investment strategy is known as EMI (Equity Market Impartial). These stocks may have uniform features, for example, market capitalization and be historically attached or maybe subjected from the same country, industry, segments. Whether the market is bullish or bearish, generating a positive regardless of returns is the main reason behind establishing EMI funds.

Merger Arbitrage

Merger Arbitrage is the idea of buying and selling the stocks together of two merging companies to avoid risk over profit. A merger arbitrage supervises the possibility of a merger isn't closing at all or on time.

Global Macro

Global Macro strategy is the macroeconomic principles or the domination of the total political and economic aspects of different countries. Domination may contain commodities and futures markets, long and short positions in equity, fixed income and currency.

Volatility Arbitrage

From the difference between the predicted future price and volatility of an asset, Volatility Arbitrage tries to have profited. Unlike stock and engage the volatility of options grounded on the asset. The strategy assigns options and various. Moreover, it may seem to volatility spreads either broaden or slandered to calculated levels.

Convertible Bond Arbitrage

Holding contemporary long and short positions in a convertible bond and it's fundamental stock entangled by Convertible Bond Arbitrage. With the grip of favorable hedge interim long and short positions, the Arbitrageur desires to profit from the market's movement.

The fund of funds approach is the other most accepted strategy. The strategy includes combining different hedge funds and grouping together of investment instruments. This mixing of strategies and assets targets give more static long-term investment outcomes than any of the individual funds. By the jumbling of fundamental strategies and funds volatility, returns and risk can be restrained.

Hedge Funds Pros

  • Makes profit from rising and falling markets
  • Maintained portfolios to minimize risk and volatility
  • Uses various investment strategy
  • Driven by the top professional managers

Hedge Funds Cons

  • High risk with High losses
  • Less liquidity
  • Holds fund for a long period
  • High leverage can damage funds


Hedge Fund is an investment partnership between the investor and the professional management firms. They are not regulated as much and operate undercover. They always look forward to gaining a huge percentage from the investment by taking a risk, which results in a great gain for the fund manager. The minimum investment requirements are high. That's what makes them different from the mutual fund. Most hedge fund investors earn an extremely high income, and their net worth is more than $1 million. Therefore, they have gained suspicious fame for their luxurious lifestyle.

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