The hedge fund is an alternative investment instrument exclusively for corporations with significant assets or experienced individual investors with significant capital.
Hedge funds, just like mutual funds, have repository of securities issued by guarantee. Again, such as mutual funds, these funds can invest in many different types of securities, but there are several differences between these two investment instruments.
First, because hedge funds are relatively less regulated than mutual funds, they can invest in a wider spectrum than mutual funds. Although many hedge funds use traditional investment instruments, such as stocks, bonds, real estate and commodity funds, their most important feature is that they turn to more complex (risky) investment sites.
Hedge funds often use long-short strategies based on balancing long positions (stock purchases) and short positions (selling money with debt and then repeating – preferably with prices falling).
In addition, many hedge funds invest in derivatives that have buy-sell contracts for a particular security at a certain price.
Many hedge funds use another technique called leverage, which is based on investing in debt money (which in turn has a high potential for profit and high risk). The name “protected fund da comes from the hedge funds’ efforts to secure their profits in any way by securing their profits through complex methods such as leverage.
Second, hedge funds are not as liquid as mutual funds, so it is difficult to dispose of shares. Mutual funds have a recalculated price per share (net asset value) every day, so you can dispose of your shares at any time. Since many hedge funds aim to make profit within a certain period of time called the deadlock period, it is not possible for investors to sell their shares during the deadlock period. (This may also be the case for venture capital mutual funds, another investment instrument that is similar to hedge funds.)
The last difference between hedge funds and mutual funds is the difference in the way managers make money. Managers of mutual funds receive salaries separately from the performance of the fund. In contrast, hedge fund managers receive a share of the profits of investors, typically between 1 and 4 percent, in addition to the management fee. This is an internal refreshing method for investors who are tired of giving management fees to the manager of a poorly performing mutual fund. On the other hand, this payment structure may cause the fund manager to make impulsive actions for more profit, thus increasing the risk of investors unnecessarily.
Because of these factors, hedge funds are an open alternative only to certain investors in many countries. For example, in the United States, one of the countries where these funds are popular, according to the law, investors who are going to enter the hedge fund must be accredited. Criteria such as having a minimum monthly minimum income, having over $ 1 million in assets and having serious investment knowledge are among the main conditions for being considered as an accredited investor.
History of Hedge Funds
In 1949, Alfred Winslow Jones laid the foundation for protection funds with the investment strategy he developed and used for the first time and made history as the “father of the hedge fund industry”. While working on investment strategies at Fortune Magazine, Jones decided to set up a $ 100,000 fund, of which $ 40,000 would be his own capital.
Jones adopted two basic strategies that are still used by hedge fund managers today: Leverage and short selling. He limited the number of investors who could join his fund to 99 in order to circulate around the conditions stipulated in the US investment law in 1940 and defined the fund as a limited partnership.
Essentially, Jones’s logic in creating the first hedge fund was not too complicated. Long positions were held in stocks with a lower value than predicted, and short positions were held in stocks with excessive value. Thus, even if the market fell or dropped, the possibility of loss of the fund was greatly reduced.
Although Jones made significant profits to his own fund through these methods, these methods did not come to light until the 60s. When George Soros and Warren Buffett adopted Jones’ strategies and introduced their own funds to the market, all the distinguished investors turned to hedge funds.
What attracted the attention of these investors was that the hedge funds had a minimum relationship with the market. These funds had to be protected against the slopes and humps of the economy. While the S&P Index declined, Jones’s investors continued to make earnings every year. Jones was receiving a 20% performance fee from his investors, a standard among hedge fund managers today. But today’s managers demand a lower management fee; Jones, on the other hand, would not receive a penny from his investors unless the fund made a profit.
The regulations on hedge funds are very limited even today; in many countries, such as the United States, there is no obligation to report within certain time periods. Therefore, hedge funds do not have the same transparency as mutual funds. It can be said that hedge funds still enjoy the privacy that other investment instruments do not have.