Investing in hedge funds is one of the most hotly debated topics in the world of investing. There are strong opinions from people at both ends of the spectrum. Sometimes, it’s easy to get swayed with the opinions of who you are with.
If you’re surrounded by investors who think hedge funds are good, you’ll probably think that you should try it too. Meanwhile, if those Flexible Trading Accounts investors start talking about the unfavorable results they got from investing in hedge fund, you’ll probably start to doubt the viability of such funds.
In this article, we aim to inform readers about both the good and the bad sides of investing in hedge funds. If you’re looking for some knowledge about the nature of hedge funds, you should read this article!
One of the main benefits of investing in hedge funds is the chance to reduce the losses you might incur if the event of heavy market selloff.
History has proven that hedge funds can prevent heavy losses from bugging investors even when the whole market is down. This improvement in downside protections is a vital part of enhancing a portfolio’s risk-return profile. It is indeed very clear that hedge funds have been successful at minimizing losses during market selloffs.
Hedge fund managers think about risks in terms of loss of capital. Thus, they try their best to actively manage risks in order to put a cap on potential losses & Trading Econonic Calendar.
A traditional fund manager, on the other hand, usually thinks about risks in terms of performance deviation from an index or benchmark. During difficult times, they generally lose just as much as the market does during down times.
By lowering the exposure to general market movements and only targeting certain risks, a hedge fund can produce a return stream that has a low level of correlation with the general risk assets such as equities. They also sport a lower level of downside volatility than general risk assets.
This has a very vital role in portfolio construction. If done very well, this can result to a more consistent return profile in a diversified portfolio.
It will not be fair if we will not talk about the potential headaches that investing in hedge funds can give you. We need to analyze the potential shortcomings of such funds.
The high fees charged by hedge funds are usually cited as a huge reason no to invest in them. Sometimes, the risk-adjusted returns after the fees are not even considered.
However, it should be worthy to consider the relationships between the fees paid and the value added by traditional investment managers.
There are two aspects of liquidity that should be considered. One is the liquidity that is offered through a fund’s normal redemption cycle. The second one, which is more problematic, is the capability or willingness of a fund to abide by its normal redemption terms in bearish or drastic environment.
Portfolio transparency can be treated on a number of different levels. However, the key for most investors is the need to understand how the fund’s portfolio is constructed and what it has.