It is generally accepted that the first hedge fund was created in 1949, when the financial journalist Alfred W. Jones attempted to equalize the effect of the market on his own investments. By buying stock that he expected to rise in price and selling short stock that he expected to fall in price Alfred W. Jones was hedging his risk. As the name implies he was “hedging” his risk on the movement of the market thus creating the first hedge fund.
Today the term hedge fund is applied to many investment funds some of which do not hedge investments to reduce their risk but to increase the risk and gain a higher return.
Normally, hedge funds are only available to wealthy people or professional companies or institutions for example pension funds. Hedge funds are investment companies usually run by a group of investment managers. Other hedge funds are not so big and are only staffed by a couple of people. However, large or small they all have considerable experience in the financial world.
The hedge fund aims to make a profit. If the investment managers think something will make a profit they will invest in it. They employ various strategies to help them achieve this end.
So what makes the hedge fund different? A hedge fund manager will have to use his considerable skill to achieve success and the state of the market will not necessarily have any affect on this. For example, they give investors the opportunity to gain returns on investments, such as stocks or shares, regardless whether that share price is rising or falling.
Hedge funds are well known to be heavily involved in the derivatives market. This is where they gamble on the direction a particular stock or currency etc., is going to take. Frequently, hedge funds operate almost totally in the derivatives market instead of buying the actual stocks or shares. If this is done to create a bigger investment it is called leverage.
Although the aim of a hedge fund is to make a profit this does not always happen and sometimes they have only mediocre results. Also very high fees are often charged so a certain amount of research needs to be done to pick the correct one. This can prove difficult on occasions, as many hedge funds will not disclose what their results are to anyone other than their own clients.
The number of hedge funds in existence has increased considerably over recent years but it should be remembered that this is just one of a variety of choices for your investment.