Key Characteristics of Hedge Funds

• Hedge funds utilize a variety of financial instruments to reduce risk, enhance returns and minimize the correlation with equity and bond markets. Many hedge funds are flexible in their investment options (can use short selling, leverage, derivatives such as puts, calls, options, futures, etc).
• Hedge funds vary enormously in terms of investment returns, volatility and risk. Many, but not all, hedge fund strategies tend to hedge against downturns in the markets being traded.
• Some hedge fund strategies have the ability to deliver non-market correlated returns. It is important to understand the strategy being employed, before investing.
• Many hedge funds have as an objective consistency of returns and capital preservation rather than magnitude of returns. They have learned this is the best way to attract large capital inflows and retain investors.
• Most hedge funds are managed by experienced investment professionals who are generally disciplined and diligent.
• 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.
• Most hedge fund managers are highly specialized and trade only within their area of expertise and competitive advantage.
• Hedge funds heavily weight managers’ remuneration towards performance incentives, thus attract the best talent in the investment business. Unfortunately, this can also lead to undue risks being taken. It is important to verify that managers have their own money invested in their fund.