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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!
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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