How to Determine if a Hedge Fund is Right for You

In financial vocabulary, "to hedge" means a fund is spreading its risk. Hedge funds are funds that are subject to less regulation than investment funds, pension funds or insurance funds. Today, the term "hedge fund" encompasses a variety of funds using non-traditional management techniques.


The significant growth of these funds dates back to the 1990s. However, how do these funds work? What are the strategies used by hedge funds? Are hedge funds regulated?

The most used hedge fund strategies will be the subject of this article. The approach used to achieve a hedge fund's performance uses the same assets as a traditional fund manager but is based on different strategies. In the wake of the market slump, caused by the bursting of the bubble, many renowned hedge fund managers have set themselves up by replacing a decline with a subsequent rally.


Renowned hedge fund managers have also enabled a rally with yields that they would have been unable to attain with the instruments and techniques available to traditional fund managers. For example, hedge funds may use a leverage effect where the interest is used to amplify the exposure to security. As a result, many hedge funds borrow additional cash at reasonable prices, creating leverage to improve their yield profile. Many hedge funds do this, but this is not an obligation, and the choice of whether or not to cover all or part of the risks depends on the investment strategy of the hedge fund.

Convertible bond management is also a comprehensive strategy for the various financial instruments used by hedge funds. Hedge funds are frequently not intended for the general public. There are also alternative hedge funds that invest, in turn, in other hedge funds. The entry ticket for an investor in a hedge fund is often a million dollars.


For example, Bridgewater is the largest independent fund manager with close to $150 billion under management. Before the crisis, alternative hedge fund management frequently achieved above-average returns. The majority of hedge funds are independent and benefit from very little regulation. Hedge funds are therefore often risky and very opaque.

Like Bridgewater, many other hedge funds have elected to set themselves up with their headquarters in New York. Some substantial hedge funds are also listed on the stock exchange. Global macro funds, also seek, for example, to take advantage of macroeconomic forecasts and can, in principle, intervene with any financial product on any financial market in the world.


Due to their aggressive management style, hedge funds are rightly or wrongly considered as a great amplifier of the major crises that the financial world has experienced in recent decades. One of the principles specific to hedge funds is the remuneration of the manager, who is strongly linked to the fund's results. Assets under management in the hedge funds industry increased from $20 billion in the 1990s to $2 trillion in the 2000s.

A hedge fund model is often called a "Two And Twenty," meaning that the manager asks the investor for an annual commission of 2% of the amount invested plus 20% of the profits made. In a majority of cases, hedge funds are also directly subject to the supervision of the national supervisory authorities. In general, the strategies used by hedge funds also aim to hedge market declines.

About the Author
About the Author Image

Gerard Ian Prudhomme, M.Sc.

has studied at Oxford, Harvard, and the University of London and has lived in Paris, Los Angeles, London, and Hawaii. He has a Master's of Science degree and has created myriad commercial, freeware, and open source software programs. Gerard has also written dozens of books. After founding his own company in 2009, he now works primarily as a freelance author and developer. He presently lives in Southern California.