The Basics of Hedge Funds & Administration Services

As your local professionals in the Tri-State Area, Halpern & Associates discuss the basics of a hedge fund.

What is a Hedge Fund?

This is a non-legal term that was originally coined to describe a certain private and unregistered investment pool. It uses complicated hedging and techniques to trade in the corporate equity markets. Previously, they were limited to only wealthy investors ready to take risks. A hedge is one that averages out gain and loss, creating a trading position that is totally neutral.

At the moment, hedge funds aren’t described as just one thing. They are flexible as they might or might not use leverage. As the investor, you are allowed to make bets that are based on a global event or you might look at the technical aspects of a stock or security with the aim of sighting a mispricing in the trade market.

Hedge funds are similar to mutual funds. They are both polled investment tools. They work by getting money from investors and investing it afterward on a collective basis. They differ in one aspect though, hedge funds are not required by law to register to follow federal regulations laws. 

Due to the fact that they have no federal regulations binding them, hedge funds, unlike mutual funds, are able to partake in sophisticated investment techniques to a larger extent, even though there are some restrictions set by the anti-fraud unit.

Types of Hedge.

Direct Hedge.

This is a type of hedge that involves swapping one asset, e.g. a stock with another asset that has similar price movement. The two assets must have a similar trading pattern. A typical example of this is when you swap a common stock position with call options.

Cross Hedge.

This is a type of hedging that involves swapping an instrument with another one that is not similar. This usually involves purchasing some preferred stocks and hedging their position with some Treasury futures.

Dynamic Hedge.

This has to do with puts, with the investor changing the amounts of puts in a position with time, though it is highly dependent on the market environment. This type of hedge is very important as it protects you from any risk that is associated with long positions. 

Static Hedge.

Just like the dynamic hedge, the static hedge also tries to eliminate risks involved in a trade. Its working mechanism is simple. A target option is set, thus not much adjustment is required as it will just follow the value of the target option. It is sometimes called the static replicating portfolio. It has a fixed and unaltered hedge until maturity. 

The main objective of a hedge fund.

All hedge funds have one thing in common, they want absolute returns and to make money for the investors. This is the reason why every type of market strategy can be used to ensure that the hedge fund achieves its goals. 

Hedge fund administration services.

Hedge funds cannot be operated without a third-party hedge fund administration service, thus it is recommended to work with a group that has your best interest in the long run. Learn more about these services and other offerings from Halpern & Associates by contacting one of our professionals today.