Why hedge funds are so attractive to investors?

[Jamie J.]

I have many questions, but the exact answer cannot be found. How do these funds work? Why for many it is a perspective view of the investment? What risks might be?

Thank you for your reaction! I'm sure you can help me to understand it.

 

[rmorse]

Hedge funds are attractive to investors because there is the expectation that they can beat the market indexes over time or provide uncorrelated returns. There is the expectation that risk/reward is better than the indexes too. I believe all these expectations can be true but not all the time. And, I feel large funds can be at a disadvantage to small ones because of the cost of scaling large positions.

 

[lawrence-lugar]

I have many questions, but the exact answer cannot be found. How do these funds work?

A hedge fund is basically a mutual fund, but they also use options for various strategies and risk/reward levels. and they may dabble in futures, commodities, etc.

The mystique or prestige of investing in hedge funds is overrated, in my opinion. The few that beat the indexes are the reason the rest of them are held in high esteem.

 

[rmorse]

A hedge fund is basically a mutual fund, but they also use options for various strategies and risk/reward levels. and they may dabble in futures, commodities, etc.

I don't like to correct forum members however, most hedge funds don't use options or futures. Most focus on equities, long or long/short, and/or fixed income. If they add futures they might have to register as a CPO which they try to avoid unless that is their focus. Some use options for hedging and some have an option focus, but that is not where most of the AUM is allocated.

 

[debitspread]

If they add futures they might have to register as a CPO

I think you meant to write "CTA".

 

[rmorse]

I think you meant to write "CTA".

Pooled funds that trade futures more than a "nominal" percentage of there assets, have to register as a Commodity Pool and be regulated by both the SEC and NFA/CFTC.

 

[Sotnis]

Hedge funds should return at least 10%+ annually because earning less would make it hard to sell to new investors

 

[Jamie J.]

most hedge funds don't use options or futures. Most focus on equities, long or long/short, and/or fixed income.

Is it right to think that hedge funds have a lower risk in comparison with mutual funds?

 

[debitspread]

Is it right to think that hedge funds have a lower risk in comparison with mutual funds?

These days hfunds typically run at/below S&P vol, though it varies by style-box. The industry's become more conservative, because of pension money.

 

[Jamie J.]

And how can hedge funds provide a protection of investments in falling markets?