Hedge Funds are alternative investment vehicles that pool investor’s money together to generate greater financial returns. They are run by a fund manager who actively builds and manages a portfolio of assets with the aim to outperform a specific market or index.
Due to their higher fees and higher minimum investment, they are utilised mainly by high net worth individuals and institutional investors such as pension funds. Underlying investments within these types of funds typically fall under the four main asset classes of: equity, bonds, real estate and cash.
The expertise of the management team with a hedge fund is what makes them unique and attracts investors. Complex investment strategies are used to generate active returns above the market. Some strategies employed are: Long/Short, Event-Driven, MergerArbitrage and Global Macro. Alongside these strategies, fund managers have expertise in portfolio construction and overall risk management.
Hedge funds tend to be more illiquid in comparison to more traditional equity or credit investments and subject to higher fees. Investors will typically pay a management fee and a performance fee. Furthermore, investors may be required to ’lock up’ their capital for a set period of time before they can withdraw or have access to it.
A key factor regarding Hedge funds is whether they are structured onshore or offshore. Funds that are managed with an onshore structure follow tighter guidelines and must abide by specific market regulations that are associated with the country they are domiciled in. Offshore funds have greater flexibility in terms of the regulations they have to follow and as such can trade more freely.
•Hedge funds are pooled investment vehicles that are actively managed to outperform the market.
•Fund managers utilize complex strategies to generate superior returns.
•Reduced regulations and their illiquid nature result in them being a more risky investment.