Hedge funds are a category of funds that have gained great popularity in the asset management field in recent years.
Regardless of the strategy adopted, the objective is absolute return, regardless of market performance. At the same time, the manager aims to reduce risk by adopting complex strategies.
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What are hedge funds
Hedge funds are private speculative investment funds. They are administered by professional management companies that adopt a variety of techniques in order to obtain a return from various investments.
In addition to the management fee, called management fee, managers usually also obtain a performance fee, commensurate with annual performance.
Compared to mutual funds, freedom of management and the speculative approach are the distinctive characteristics of hedge funds.
The meaning of the expression recalls hedging techniques, protection strategies aimed at limiting the risk and volatility of the portfolio.
The origin of this instrument dates back to 1949, when Fortune journalist Alfred Winslow Jones created the first hedge fund, developing a management technique aimed at protecting capital from market fluctuations and declines.
Since their origins, hedge funds have been characterized by the use of short selling and leverage.
Hedge fund tools and objectives
Initially, the logic of hedge funds was focused on hedging strategies, with the aim of limiting the risk of losses.
Over time, the approach of these funds has increasingly evolved towards derivative instruments, such as futures and swaps, emphasizing the speculative perspective and the use of financial leverage.
The typical instrument of hedge funds is the short selling of shares or short selling.
The profit from the operation is given by the difference between the sale price of the securities, borrowed by the manager, anticipating their future depreciation, and the repurchase price.
Long/short techniques are based on the purchase and sale of stocks with opposite characteristics. The focus is placed on the quality of the stocks of securities purchased.
Stock selection or stock picking, i.e. the selection of securities, has the objective of protecting the investment from market fluctuations and limiting portfolio exposure.
At the same time, the aim is to maximize returns by exploiting financial leverage. I.e. using borrowed money to multiply the investment and potential earnings.
Types of hedge funds
Speculative hedge funds can be classified into macro categories, based on the approach mainly adopted by the manager.
- Equity hedge, invests in equity securities adopting long and short selling strategies;
- Hedge market neutral, or Relative value, are funds that aim to maintain neutral exposure, regardless of the securities in the portfolio;
- Event driven funds, on the other hand, represent a distinct category of hedge funds. The meaning of the expression is linked to the specificity of betting on extraordinary corporate events and operations such as mergers and restructurings;
- Finally, Global macro bases the investment logic on currencies and macroeconomic correlations. Global asset allocation, more specifically, is a strategy based on 360° investments in world markets with a preference for liquid securities. This type of approach requires large availability of capital and is characteristic of sovereign funds.
Read also: Navigating different types of bonds: a brief guide
