What Are Hedge Funds?

What Are Hedge Funds?

You might have heard about George Soros and his famous Quantum Fund, the very ‘weapon’ that ‘broke’ the Bank of England (a central bank) way back in 1992, forcing it to devalue the British Pound.

The Quantum Fund is what we call a hedge fund. So what are these investment instruments?

Hedge funds are loosely regulated investment companies that seek to generate absolute returns uncorrelated with any market benchmark or index. In other words, they strive to maximize their returns regardless of the current market scenario.

These instruments also utilize a wide variety of trading strategies, and may or may not use hedging techniques to reduce or eliminate their risks, in line with the trading strategies they adopt.

While the Quantum Fund no longer exists (the fund ended by the end of 2011 after returning all external funds, and is now privately managed by the Soros’ family fund), these class of funds continue to gain popularity among institutional investors and high net worth individuals. The global hedge funds industry is valued in excess of $1.7 trillion, and is ever-growing.

Hedge funds are a distinct class of funds on its own, and have distinct characteristics that differ from the traditional mutual funds (also commonly referred to as unit trusts) and the Exchange Traded Funds (ETFs), another class of funds that is growing in popularity in advanced markets.

While these characteristics will allow hedge funds to strive for lucrative rewards, they will also introduce a different set of risk exposures that the investor has to content with. Therefore, it is crucial that investors seeking to include these instruments in their portfolio be familiar with these characteristics.

Finally, hedge funds constitutes a class of assets on its own, and are sometimes classified as a restricted investment vehicle that only accredited investors or the ‘rich’ can get to invest in. Rules and restrictions with regards to the minimum investment needed to invest into a hedge fund, or requirements with regards to the minimum income or net worth required before an investor is allowed to invest into a hedge fund usually apply in many mature economies. For example, single hedge funds sold in Singapore require a minimum investment of S$100,000 or more, a pretty massive sum!