Hedge Fund and hedge funds have been spoken about in the press quite a bit, is not unlike a mutual fund and that money is pooled. The money of many investors is pooled and then managed by, in this case, a hedge fund manager who is an investment professional. He takes investment decisions on behalf of the investors and contributors of money into his fund.
Where hedge funds differ is; first of all, they don't have a benchmark in the same way. Hedge funds are also referred to as absolute return funds and on that basis they tend to focus just on making money as opposed to beating a benchmark, for example, the S&P 500.
Hedge funds can also typically often short sell investments which means selling an investment that one doesn't own in order to buy it back at a lower price and therefore benefit from a decline in price. So hedge funds can basically make money also when an investment loses value, which mutual funds typically can't do because they tend to be long owners of securities and if the price falls, they tend to lose money whereas a hedge fund can money when a securities price declines and more on that in the book.
The other way in which hedge funds differ from mutual funds is that hedge funds tend to employ leverage and often can employ leverage and are not restricted from employing leverage, i.e., borrowing money to increase the return. As you remember from leverage, basically when we borrow money to buy an asset our returns are magnified greatly because the actual money that we have at stake our own equity at a small proportion or the smaller proportion of the overall item and so let's say that we will go back to you can go back to the leverage section to clarify that or read upon in the book but they often use leverage to tank research and they aren't restricted from using the leverage. So that means arguably better returns if they are right when they are using leverage but also more risk when they are using leverage.
The other thing that hedge funds differ from mutual funds that they tend to be -- because they are less restricted in what they are invest in, they can react much more quickly to market events. So let's say it hedge fund that has a loosely defined mandate of investing in global equities can respond much more quickly to events, crisis, opportunities then for example, mutual fund is defined and constrained to invest in the U.S. stock market.
So that's by definition a more restricted investment, whereas a global equity hedge fund it can be very, very quick. It isn't held back by a bench mark, if it says they have to have so much money in Asia, sound so much, that the bench mark has so much, so much money in Asia, so much, so much in Europe and therefore it where they don't deviate too much from it and therefore can't jump into an opportunistic situation.
And lastly hedge funds tend to be less regulated and that's often a topic of discussion as well. They tend to be offered to lots of individuals and more sophisticated professionals who are both thought to be better able to asses the risk and also thought to be someone in a better position to afford a loss. Whether they are actually more risky, is a matter of how you define risk because the market risk could arguably be much less with the hedge fund because they are not just buying investments, they also can benefit from price decline.
So they might have much less market risk. In that sense they are less risky but they might have much more say manager your risk because you don't know what the portfolio -- what the actual hedge fund manager is going to do. So that it's a slightly different risk but they started from the regulatory standpoint; they are considered to be generally more risky investments.
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