Arbitrage Hedge Fund
A hedge fund is a term commonly used to describe any fund that charges performance fees and that isn’t a normal investment fund that is, any fund using a approach or set of methods other than only investing long in shares (unit trusts/mutual funds), bonds, money markets (money market funds), property, venture capital or LBOs (leveraged buy-outs). Hedge fund systems, also referred to as alternative investment strategies, include selling stocks short, various arbitrage strategies, protecting against market drops by short selling or by using options, investing in different assets such as currencies or distressed securities, and utilizing return increasing tools such as leverage, derivatives, and arbitrage.
While media stories about in the past have often focused on funds generating big returns, the broad majority of hedge funds make stability and stableness of return, rather than magnitude, their primary goal.
They may sell shares short to cover themselves against a drop in stock values. They may buy put options, which give them the right to sell stocks at a specified future price, in order to lock in a sell price in the event of a severe market drop. They may buy interest-paying bonds or trade claims of companies undergoing reorganization, insolvency, or some other corporate reorganising, counting on events in a company, rather than more random macro trends, to affect their investment.
There are a mixture of strategies for investors to look at. The more moderate of these strategies are generally not correlated to equity markets, and deliver regular profits with low volatility.
More aggressive hedge funds that seek larger returns, albeit with higher volatility, are also available. These strategies often have a directional bias to the market, either long or short (long/short equity), or may seek to speculate on future market moves in equity markets, currency markets and bond markets (global macro funds). Aggressive funds have the capacity to enjoy high gains, but can also be susceptible to volatile returns.