Hedge funds appear again and again in the media, are often the subject of discussion, and have also been available to private investors with direct access for some time. While hedge funds are named for a high level of security, the English verb to hedge means to secure, they are considered highly risky among investors. While all other fund classes have clear guidelines as to which market segments the respective fund may invest in and how investor funds must be distributed, hedge funds are completely unlimited.
- The protection of a hedge fund aims to exclude any market risk by fully covering all investment options and to generate a consistently high return.
- Hedge fund managers do not act arbitrarily out of the market situation, but pursue different strategies.
Protection against market risks
Short for HF by abbreviationfinder, the protection of a hedge fund aims to exclude any market risk by fully covering all investment options and to generate a consistently high return. This is where the critics come in. Hedge funds are also allowed to invest in derivatives, especially in leveraged products. In the case of a leveraged product, the trader does not use the entire volume of the traded value, but only a fraction. If one million euros are to be invested in gold with a leverage of 200: 1, only 5,000 euros have to be used. Against the background that hedge funds move two or three-digit volumes, the risks are obvious, if one considers the sums that are possible with a stake of 10 million euros. If the trade runs out of money, i.e. it ends with a loss,
Hedge funds as a fund of funds concept
Access to a hedge fund is available to private investors in various ways. Investment companies represent one possibility. Here the investor participates indirectly by acquiring shares in an investment company which in turn operates the hedge fund. Another alternative is a fund of funds, which in turn distributes the investor capital among various hedge funds.
The investment strategies of the hedge funds
Hedge fund managers do not act arbitrarily out of the market situation, but pursue different strategies. So-called short sales are not uncommon if the price development on the stock markets is positive for a longer period of time. In this case, the fund management borrows shares from a third party and sells them. If the price falls, the fund buys the shares again at a lower price and books them back into the borrower’s account. In this case, the difference between the sale and subsequent purchase represents the profit. This strategy, known as short selling, poses a risk to the financial markets and has been banned in Germany since 2010.
Another strategy, known as event driven, relies on short-term events that lead to high price fluctuations. These include, for example, company takeovers or company restructuring.
The systematic trend following
The systematic trend following is based on mathematical models that check which buy or sell signals are available in the market. This strategy applies to all value that can be traded. This applies to stocks as well as currencies or commodities. In general, the fund management team has no limits when it comes to choosing investments.
Global macro strategy
In the global macro strategy, the fund manager looks at a market or industry in terms of the macroeconomic context. With this strategy, buy and sell signals can also be derived from the macroeconomic data. The global macro strategy is one of the most successful strategies on the one hand, and one of the most volatile on the other.
The fund management
While the fund manager of an equity fund that is focused on German stocks has to concentrate exclusively on this market, fund managers of a hedge fund are faced with the task of keeping an eye on all markets. This complexity requires highly qualified specialists who also demand a corresponding salary. The remuneration is usually based on a performance-related payment and is not infrequently between 15 and 20 percent of the return achieved.