Hedge Funds

Financial Markets and Risk Management

Formative Assignment

Topic a - Hedge Funds

A hedge fund is a fund that can take both long and short positions, make use of techniques such as short selling, leverage, arbitrage, buy and sell undervalued securities, trade options or bonds, and invest in almost any opportunity in any market where it foresees impressive gains at reduced risk. Pension funds, endowments, insurance companies, private banks and high net worth individuals and families invest in hedge funds to minimize overall portfolio volatility and enhance returns. The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions. There are many notable hedge fund firms such as Soros Fund Management and BlackRock.

A hedge fund is usually a company or partnership to make investments, and has no employees and no assets other than its investments. The portfolio is managed by the investment manager, a separate entity that employs the people who manage the portfolio and which is the actual hedge fund business. As well as the investment manager, the other functions of a hedge fund are delegated to a number of other service providers such as Prime broker and Distributor. Prime brokerage services include lending money, acting as counterparty to derivative contracts, lending securities for the purpose of short selling, trade execution, clearing and settlement. Most prime brokers also provide custody services for the fund's assets. Prime brokers are typically parts of large investment banks. The distributor is responsible for marketing the fund to potential investors. Frequently, this role is taken by the investment manager.

Hedge fund strategies vary remarkably. There are approximately 20 wide ranges of investment strategies used by hedge funds, each offering different degrees of risk and return. Many hedge against falling in the markets, especially important today...