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Hedge

In: Business and Management

Submitted By tonydewsnap
Words 2210
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Question 4.
At its most basic level hedging is a strategy aimed at reducing potential significant losses (and gains) of an individual and/or organisation. In the world of sports betting this can mean covering a bet you have made on team A by backing team B at some point in the contest to ‘hedge’ your position. In finance there are numerous strategies used, a number of which I will explain later. The goal of a hedge fund is to generate positive returns no matter what the market does.

A hedge fund can be described as an “actively managed private investment fund that seeks positive attractive returns”. Frush, Scott. (2006). Understanding Hedge Funds. Ann Logue differentiates them from other investment tools, “They differ from so called ‘real money’ traditional investment accounts such as mutual funds, pensions, endowments and so forth, because they have more freedom to pursue different investment strategies”. Logue, Ann C. (2006). Hedge Funds For Dummies. This comment is valid as for the most part they are not as heavily regulated as other investment institutions.

In his book Investing in Hedge Funds (2005), Joseph Nicholas asserts that in days gone by the term hedge fund is actually used to describe both a structure that is “a co-mingled investment fund” and a strategy. Today, however he argues that it is best describes the context of the structure of the investment and the strategy used to help the strategy come to fruition. Similar to most private equity funds hedge funds are set up as limited liability companies or partnerships to protect investors from being exposed to losses more than their initial investment. Typically fund fees are structured in two parts, a management fee of 1-2% of the assets being managed and a performance fee of 15-20% of the returns over and above a previously agreed benchmark. It is not uncommon for funds to restrict inflow and…...

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