A hedge fund is a fund that can take both long and short positions, use arbitrage, buy and sell distressed securities, trade options or bonds, and invest in just about any opportunity in any market where it foresees impressive gains at reduced risk. Hedge funds often hedge against downturns in the markets, which is especially important today with volatility and anticipation of corrections in overheated stock markets.

      There are approximately 14 distinct investment strategies used by hedge funds, each offering different degrees of risk and return. A macro hedge fund, for example, invests in stock and bond markets and other investment opportunities in hopes of profiting on significant shifts in such things as global interest rates and countries’ economic policies. It is more volatile but potentially faster growing than a distressed-securities hedge fund that buys the equity or debt of companies about to enter or exit financial distress. A third type of hedge fund, an equity hedge fund, may be global or country specific, hedging against downturns in equity markets by shorting overvalued stocks or stock indexes, while a relative value hedge fund is one which trades off differences of securities in the same capital structure.

      It is important to understand the differences between the various hedge fund strategies because all hedge funds are not the same -- investment returns, volatility, and risk vary enormously among the different hedge fund strategies. Some strategies which are not correlated to equity markets are able to deliver consistent returns with extremely low risk of loss, while others may be as or more volatile than mutual funds. A successful fund of funds recognizes these differences and blends various strategies and asset classes together to create more stable long-term investment returns than any of the individual funds.

Learn More About Hedge Funds

  What Is a Hedge Fund?
  What Are the Different Hedge Fund Strategies?
  Hedge Fund Styles
  Advantages of Hedge Funds Over Mutual Funds
  Benefits of Hedge Funds
  What Is a Fund of Hedge Funds?
  Benefits of a Fund of Hedge Funds
  Hedge Fund Articles

  Taking the Mystery Out of Hedge Funds
  By Dion Friedland, Chairman, Magnum Funds

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  Other Articles By Dion Friedland, Chairman, Magnum Funds:

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       The Kingdom of Hedge Funds
       The Case for Convertibles
       What's Special About Special Situations Fixed Income?
       Reducing Market Risk With Merger Arbitrage
       Distressed Securities Investing
       Private-to-Public Investing
       Global Macro Investing
       Market Neutral Long/Short Equity Trading