Hedge funds are largely unregulated pool of liquid capital that is private and whose managers can at anytime buy or sell any assets or bet on falling as well as rising assets, and also participate substantially in any profits from the money invested in the funds. The fund is typically open only to very wealthy and qualified investors with its activity in the public securities market growing substantially, accounting for approximately 10 % of all U.S. fixed-income securities transactions, 35% of U.S. activities in derivatives with investment-grade ratings, 55% of the trading volume for emerging-market bonds, and 30% of equity trades. Hedge funds have quickly become a dominant player in the world of debt. In some corners of the market—often among the most complex areas—they are the biggest force by far. Hedge funds are responsible for nearly 30% of all U.S. fixed-income.
“Hedge fund” has no uniformly accepted meaning, but it commonly refers to a professionally managed pool of assets that are used to invest and trade in equity securities, fixed-income securities, derivatives, futures and other financial instruments. Participation in a hedge fund typically is restricted to relatively wealthy individual and institutional investors that satisfy private offering standards. Inclusion of “hedge” in the term is useful for distinguishing a hedge fund from another type of investment pool (such as mutual fund, a venture capital fund, a private equity fund or a commodity pool), but has little descriptive value—a hedge fund may or may not hedge against risks.
Some hedge funds invest only in securities and only for long term, whereas some hedge funds never invest at all, but only trade to profit market or security depreciation. Some long-short hedge funds sell securities short to guard against risks in their long investment; some sell securities short opportunistically to profit from expected declines in the prices of the securities; and some do both. Some hedge funds trade in put and call options or futures contracts to hedge; others do so hoping to profit from directional security or market bets. Some hedge funds are fundamental investors, while others rely on technical analysis. Some hedge funds invest and trade only distressed debt instruments. Some attempt to take advantage of pricing discrepancies between different markets in the same instruments through any of an array of arbitrage strategies. Some hedge funds specialize in exotica of currency trading, while some refuse even to consider security that is not denominated in U.S. dollars.
Hedge funds thus do not represent an asset class or any particular style of portfolio management. The investment philosophies of hedge funds are as diverse as their portfolio managers. Hedge fund investments techniques and methods represent their managers individual experiences, background and biases. Thus, it is not wrong to say that hedge funds in this vast financial market keep popping everywhere.
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