Have you ever done capital market and financial investments? Well if you haven't, then you might want to consider of doing it because of the earning potential that is so huge. Many people in the financial market conduct their investment in a fund pool mechanism. This is to administer the high required amount of funds in order to perform good financial investment portfolio. There are financial institutions that provide this fund pool for collective investments. The name for their product is mutual fund.
As interesting as they become, mutual funds are growing into sub types. The purpose of this segregation is to be able to manage the investment better by matching the return expectation and the whole investment goal. Three fundamental types of mutual fund are Equity Fund, Fixed Income Fund and Money Market Fund. Some minor variety expands from this fundamental types, namely the Mixed or Balanced Fund. This means a mutual fund that mixes the variety of alternatives provided in the all three of fundamental funds.
But there is one expansion that stands out, hedge funds. This youngest brother in the mutual funds family is very popular since it preserves the best of mutual funds quality but with a much higher returns. We'll see what a hedge fund is and how it can generate such a high return for its investors.
Hedge Fund Defined
What's a hedge fund? Suffice it to say, it's a profit hunting mechanism. The mechanism that is nestled in a vehicle or scheme of mutual fund-type of fund pool. So if you imagine what a hedge fund is, then imagine what a mutual fund is like. Any differences? Yes, of course. For one thing, hedge fund is unregulated. That is to say, it's able to perform both short and long strategy, something that a regular mutual fund is not yet to take as a strategy based on a regulating law.
Another unregulated aspect of hedge fund mechanism is the fact that it is able to perform very speculative actions in order to hunt down any profits possible from various tradings and derivatives, may it be contract-based profits or spread profits. Point is, flexibility appears as a very dense quality in performing hedge fund management.
For investors, playing in hedge fund requires a large amount of money. This is possibly des
igned as a way to provide sufficient capacity for the entire risk exposures of the overall funds. One thing to remember, is that hedge fund preserves the tendency of exclusiveness. A single hedge fund participation is limited to several investors only. This is one of the difference with regular mutual funds, the number of investors participating is very numerous, can be up to hundreds while in hedge funds the number is very fewer and limited. But from these limited number of participating investors are gathered a very large amount of money to be invested.
Naming
The naming is also interesting. Hedge Fund. What to hedge? Why do they conduct hedging if indeed that's what they do? Well, the name was indeed confusing for the first time. My first impression is that this type of fund takes advantage from asset or liabilities hedging in order to gain profits. How is that even making a profitable sense?
It turns out, the initiation of hedge fund is to hedge a bear market. Since hedging attempts are done through various contracts and derivative involvements, this type of fund grew into a specific purpose: hunting profits from hedging vehicles. In turn, this also grew into involving not only hedging vehicles but also other forms, or probably all forms, of financial arrangements. For this strategy, hedge fund can no longer taken into account simply as a fund pool to hedge risk. In fact, hedge fund possibly bear a much greater risk than the market itself. So we can see why hedge fund is not like how it sounds.
Pros and Cons
Hedge fund is really popular due to the fact that its potential to gain a much greater return with a much greater risk exposures. It is the riches' favorite. The performance can also reasonably hoped for since hedge fund requires investment manager with high professional reputation. In the US, hedge fund managers must hold a proper accreditation. Along with the aggressive strategies, well accredited managers bring a rational hope for investors of a good investment performance.
But from the macroeconomic perspective, the existence of aggressive speculations carrie
d out by hedge fund practices may endanger the economy through the possible rising of inflation rate. Financial speculation will create money concentration in financial market, thanks to predetermined return and contract mechanisms that can literally create more money. If this is conducted in a large amount of money, and thus the more amount it creates, then there will be a state where money supply is greater than goods and services supply due to less money invested in real sector. This is the irony, on one side hedge fund creates prosperity for its investors, while on the other hand the intense speculative practices it conducts shrink the real sector, making it smaller than it should be compared to the large amount of money available.
This is probably the time for us to rethink about the best way of conducting financial investments. Figure out how to make a decent balance between financial and real sector and the investment gain can become a true prosperity.
What are your thoughts?
(Image sources: 4.bp.blogspot.com, www.onlineinvestingai.com, static.howstuffworks.com).
As interesting as they become, mutual funds are growing into sub types. The purpose of this segregation is to be able to manage the investment better by matching the return expectation and the whole investment goal. Three fundamental types of mutual fund are Equity Fund, Fixed Income Fund and Money Market Fund. Some minor variety expands from this fundamental types, namely the Mixed or Balanced Fund. This means a mutual fund that mixes the variety of alternatives provided in the all three of fundamental funds.
But there is one expansion that stands out, hedge funds. This youngest brother in the mutual funds family is very popular since it preserves the best of mutual funds quality but with a much higher returns. We'll see what a hedge fund is and how it can generate such a high return for its investors.
Hedge Fund Defined
What's a hedge fund? Suffice it to say, it's a profit hunting mechanism. The mechanism that is nestled in a vehicle or scheme of mutual fund-type of fund pool. So if you imagine what a hedge fund is, then imagine what a mutual fund is like. Any differences? Yes, of course. For one thing, hedge fund is unregulated. That is to say, it's able to perform both short and long strategy, something that a regular mutual fund is not yet to take as a strategy based on a regulating law.
Another unregulated aspect of hedge fund mechanism is the fact that it is able to perform very speculative actions in order to hunt down any profits possible from various tradings and derivatives, may it be contract-based profits or spread profits. Point is, flexibility appears as a very dense quality in performing hedge fund management.
For investors, playing in hedge fund requires a large amount of money. This is possibly des
igned as a way to provide sufficient capacity for the entire risk exposures of the overall funds. One thing to remember, is that hedge fund preserves the tendency of exclusiveness. A single hedge fund participation is limited to several investors only. This is one of the difference with regular mutual funds, the number of investors participating is very numerous, can be up to hundreds while in hedge funds the number is very fewer and limited. But from these limited number of participating investors are gathered a very large amount of money to be invested.Naming
The naming is also interesting. Hedge Fund. What to hedge? Why do they conduct hedging if indeed that's what they do? Well, the name was indeed confusing for the first time. My first impression is that this type of fund takes advantage from asset or liabilities hedging in order to gain profits. How is that even making a profitable sense?
It turns out, the initiation of hedge fund is to hedge a bear market. Since hedging attempts are done through various contracts and derivative involvements, this type of fund grew into a specific purpose: hunting profits from hedging vehicles. In turn, this also grew into involving not only hedging vehicles but also other forms, or probably all forms, of financial arrangements. For this strategy, hedge fund can no longer taken into account simply as a fund pool to hedge risk. In fact, hedge fund possibly bear a much greater risk than the market itself. So we can see why hedge fund is not like how it sounds.
Pros and Cons
Hedge fund is really popular due to the fact that its potential to gain a much greater return with a much greater risk exposures. It is the riches' favorite. The performance can also reasonably hoped for since hedge fund requires investment manager with high professional reputation. In the US, hedge fund managers must hold a proper accreditation. Along with the aggressive strategies, well accredited managers bring a rational hope for investors of a good investment performance.
But from the macroeconomic perspective, the existence of aggressive speculations carrie
d out by hedge fund practices may endanger the economy through the possible rising of inflation rate. Financial speculation will create money concentration in financial market, thanks to predetermined return and contract mechanisms that can literally create more money. If this is conducted in a large amount of money, and thus the more amount it creates, then there will be a state where money supply is greater than goods and services supply due to less money invested in real sector. This is the irony, on one side hedge fund creates prosperity for its investors, while on the other hand the intense speculative practices it conducts shrink the real sector, making it smaller than it should be compared to the large amount of money available.This is probably the time for us to rethink about the best way of conducting financial investments. Figure out how to make a decent balance between financial and real sector and the investment gain can become a true prosperity.
What are your thoughts?
(Image sources: 4.bp.blogspot.com, www.onlineinvestingai.com, static.howstuffworks.com).
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