Monday, December 18, 2006
Hedge Funds
Hedge Funds
After the last article about the importance of gains and losses and proportions to the rest of investors, I thought an article discussing hedge funds would be fitting. By definition from InvestorWords.com “A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Hedge funds are exempt from many of the rules and regulations governing other mutual funds, which allows them to accomplish aggressive investing goals. They are restricted by law to no more than 100 investors per fund, and as a result most hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million. As with traditional mutual funds, investors in hedge funds pay a management fee; however, hedge funds also collect a percentage of the profits (usually 20%).”
Hedge funds are basically mutual funds on ecstasy. Everything in a hedge fund is quick and perhaps, depending on your perspective, shadier. As stated above, hedge funds can utilize various investment vehicles that are not open to ordinary funds. Mutual funds are held to stronger laws and more scrutiny from government agencies such as the SEC than hedge funds.
Hedge funds also have the ability to sell short. In falling markets, mutual funds have to work to just protect capital rather than grow it. Hedge funds have the options to enter short positions meaning hedge funds have the capability to gain in markets that are detrimental to mutual fund portfolios.
Granted, in a falling market not every company loses value, but the census is an overall loss. Hedge funds offer more investment opportunities and a higher chance of return in the best and the worst of markets.
Hedge funds often employ strategies that work for short term, greater risk gains. While mututal funds may hold a stock for years at a time, hedge funds can enter in and out of trades whenever desired. The buying and selling of mutual funds must be reported and carries much more red tape. A hedge fund has the liquidity and ability to buy in the morning and sell at close after just a day of trading.
I would argue that the reason for such trendy and choppy markets is due to such hedge funds. Hedge fund managers are usually younger than traditional and older mutual fund managers. Technical analysis is applied more with younger investors than the older because it is a new science. The ways of mutual fund managers will not be changed but I believe that hedge fund managers are more willing to change their investing ways.
Hedge funds help keep the markets in control. They act as strong support and resistance controls to keep the markets in an identifiable range. Hedge funds keep the market in line for the retail investors. Mutual funds do not have the same impact on the markets like hedge funds. They are severely limited by government laws and regulations. Because of the impeding laws, mutual funds often opt to hold investments through long periods of time.