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Hedge Funds Can Minimize Investment Risk by Investing

Coverage funds are an alternative investment method. This is a form of investment where funds are brought together and invested using different investment strategies to generate profits in a financial partnership between the fund manager and investors.

The fund manager is called a general partner and investors are called limited partners. The role of limited partners is the investment of funds and that of the sponsor manages them. Investors are provided a cover prospectus that provides information on the key aspects of the Fund, such as the investment strategy, the type of investment and the fund's leverage.

As the name suggests, hedge funds operate to "cover" or avoid risks. We therefore find that the goal of hedge funds is the maximization of benefits with risk minimization. They are intended to generate benefits regardless of market fluctuations. They minimize risks by providing investors from going for long or short stocks. The short circuit involves making money when the stock falls.

An investment manager manages funds through a separate company from the hedge fund and its asset portfolio. The investment manager uses the support of the following service providers:

1. First brokers

They help eliminate trade, provide a leverage and short-term funding.

2. Administrator

They provide operations, accounting and evaluation services.

3. Distributors

They mainly deal with the distribution of securities. A distributor may be a subscriber, a reseller or broker.

The investment strategies adopted can be classified as follows:

  • Discretionary / Qualitative: These are strategies selected by the General Partner or the Fund Manager.
  • Systematic / Quantitative: These are strategies suggested by a computerized system.

4. Characteristics of hedge funds:

  • Available only for accredited investors

5. Investors must have a certain net worth before investing in hedge funds.

  • Variety of investment options

6. It can be invested in various areas such as land, real estate, stocks, derivatives, currencies, etc.

  • Use a lever effect

7. Borrowed money is often used to improve returns.

  • They charge management fees and performance fees.

The main advantage of investment in hedge funds is that the risk is lower than other types of investments. It can be said that they must be uncorrelated with market indices. However, the fact that it remains that they are subject to a certain amount of risk. Therefore, it's a good approach to knowing all the potential risks before investing. It is also essential to select an experienced fund manager on the ground.

Source by Kanika Saxena

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