Understanding Hedge Funds

Ravi S Madapati

The IUP Journal of Financial Economics, 2004, vol. II, issue 2, 64-70

Abstract: Hedge funds are just like mutual funds in which they pool investors’ money. However, they are very unconventional in the way they work. The prime aim is to maximize return on investment while covering their risk adequately. They invest in all the major capital markets in the world, though not simultaneously. They use all kinds of financial instruments imaginable such as equities, bonds, derivatives, currencies, warrants. Basically they use “high-risk, high-leverage speculative methods”. The strategies are more niche-like, such as, aggressive growth, macro, market neutral arbitrage, multi strategy, short selling, and funds of hedge funds. Hedge fund returns over a sustained period of time have outperformed standard equity and bond indexes with less volatility and less risk of loss than equities. An increasing number of endowments and pension funds allocate assets to hedge funds. It has been observed that hedge funds perform better than the mutual funds in the bearish times

Date: 2004
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