Hedge Funds as Alternative Investments: Everything You Need to Know
Hedge funds are a more relevant name in the modern financial management industry. However, many financial novices find it hard to understand the concept of hedge funds and how they fit as an alternative investment.
In this article, we discuss everything you need to know about hedge funds, alternative investments, and how hedge funds work as alternative investments.
Let’s dive in.
Hedge funds are a high-risk, high-reward investment funds
The best way to understand hedge funds is to look at the way their investments are made.
Simply put, a hedge fund is just a fancy name for some investment partnerships — but not all investment partnerships are hedge funds. The partnerships that have the freedom of more “aggressive” investing are the ones that can be labeled as hedge funds.
Unlike mutual funds, hedge funds can be invested in a broader spectrum of products from different areas, leading to more risk but a better possible reward.
Some like to call it a professional “marriage” between two entities. The first entity is a professional fund manager, sometimes also called a general manager — responsible for making all the investment arrangements. The second is an investor, also called a limited partner sometimes, who pours most of the money into the fund.
When both the partners invest their money into the fund, they employ different strategies to gain a return on their investments. These strategies may come from any of the two partners but are employed collectively.
The entities may use the collective funds aggressively. That means they may use leverages or derivates to generate a higher chance of receiving a massive return.
There are numerous strategies that could be employed in hedge funds, namely long-short equity, market neutral, volatility arbitrage, and merger arbitrage.
Regarding the access to hedge funds, they are only accessible to the investors in most cases. However, you and your partners may communicate to come up with a different approach.
Alternative investment — a non-conventional financial asset
Typical financial assets are categorized into three types, i.e., stocks, bonds, and cash — and those canʼt be called alternative investments. Alternatives include things like private equity, venture capital, managed futures, art & antiques, commodities, derivatives contracts, and of course, hedge funds.
Sometimes, real estate is also categorized as an alternative investment.
Many of the alternative investments are often illiquid and have fewer regulations that must be followed. Alternative investments were originally aimed at accredited or institutional investors. But as time passed, they became more and more accessible to retail investors too. Today, retail investors can make alternative investments through mutual funds, alt funds, and ETFs.
Hedge funds as alternative investments
Many financial entities keep their hedge funds as alternative investments. As the funds are collected collectively from both the investing parties and invested in a fund, it can be taken as a non-conventional type of financial assets.
The hedge fund holds financial value for the investing parties. Just like other non-conventional financial assets, they canʼt be converted into money on short notice. However, they are still an asset that may ultimately return value after the employment of various aggressive strategies by the investing parties.
As a result, the hedge funds actually serve to be a really solid form of alternative investment. Even though they started out slow, hedge funds are now becoming popular among modern financial institutions that want to gain massive financial gains over a short period.
Hedge funds are high-risk, high-reward investment opportunities that hold tremendous value for thriving financial entities. They are categorized as alternative investments as they canʼt be converted into cash on short notice.
Hedge funds are rising in popularity as alternative funds in growing and thriving financial institutions as a modern means of investment.
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