Could someone explain to me what a hedge fund is? How are people using hedges in oil (recent news). Confused!?

Question

Could someone explain to me what a hedge fund is? How are people using hedges in oil (recent news). Confused!?

Answer 1

Hedge funds are private investment funds with a certain criteria to accept investors.  They are unregulated and limited to their number of investors, unlike mutual funds that are regulated by the SEC and virtually unlimited in the number of investors they accept.  Although mutual funds do close to new investors at times.  Mutual funds invest in stocks and bonds.  Hedge funds invest in every part of the financial markets. stocks, bonds, commodities, currencies, futures and other things.  And they can take long and short positions in any investment.  So they can create complex hedging strategies.  But they also use large degrees of leverage, with borrowed money, which create a great deal of risk. Mutual funds seek relative returns.  Returns relative to an index such as the S&P 500.  They seek to do better  than the index, but that doesnt mean a positive return. Hedge funds seek absolute returns, positive returns no matter what the market does.  Hedge funds typically charge a 2 percent management fee, and take 20 percent of the profits.

Answer 2

A hedge fund is a fund that will invest in anything. Short stocks, Legal outcomes, special situations, pre-IPOs, property, wine etc. The term hedge presumably comes from the fact that they will find an alternative investment (asset class) to equities, especially in a falling market.

A hedge, maybe in oil is to try and counter any losses or potential losses that may occur in an investment you are exposed to. So if you require oil for your business, you would buy oil futures as a hedge against rising prices. If you are holding shares you could hedge potential losses by short selling the relevent index or maybre by buying Put options. Of course a normal hedge will prevent you making as good profits if the price moves the other way.

Answer 3

Most hedge funds are like mutual funds for the rich. The minimum investment may be $2 mil, for example. The manager then takes a large fee ( could be 20%) to manage a portfolio that is supposed to get great returns. They are hedged because they invest long ( expecting an investment to rise in price) and invest short (expecting some investments to fall in price, and making $ as it falls.)

Hedging can be done by any investor, even a small investor. That is someone who controls risk by purchasing or selling options as well as holding stock, both long and short the market.

Answer 4

Hedge Funds are pooled investment vehicles that are usually set up as private partnership.

The difference between hedge funds and mutual funds is that hedge funds are higher risk because of the investment strategies that it undertakes.

You can refer to the website below for types of hedge funds.