Hedge fund, also known as hedge fund or arbitrage fund, refers to a financial fund that combines financial derivatives such as financial futures and financial options with financial institutions and obtains profits by means of high-risk speculation. It is a form of investment fund, which belongs to exempt market products. Hedge funds are called funds, which are essentially different from mutual funds in terms of security, income and appreciation.

The so-called hedge fund is to buy two or more securities with negative prices at the same time to form a portfolio, and at the same time expect the unreasonable prices of securities in this portfolio to gradually disappear, so as to make the whole portfolio profitable.

For example, 1997, the interest rate of Italian government bonds is higher than that of German government bonds. It is expected that with the acceleration of European integration, the increase of financial transactions among European governments will eliminate the interest rate gap between government bonds, so we can make more high-interest bonds and short low-interest bonds at the same time. When the interest rates of two bonds are equal in the future, the whole portfolio will be profitable.

Hedge funds mostly use financial derivatives and tools and short selling to buy and sell, and strive to seize profit opportunities in both sharply rising markets and sharply falling markets. The investment objectives of hedge funds are vague. In addition to traditional securities, the objects include futures, options and various financial derivatives and tools. More financial derivatives and instruments and short selling are used for trading. Invest in diversified assets and use hedging technology. If you don't short, you must use financial leverage, such as financing from banks, to increase your bets.

Fund managers of hedge funds have great flexibility in operation. Therefore, hedge fund managers can make use of almost all legal means in the market to make profits and get high returns. In addition to the traditional long-term holding of securities, there are the following common trading strategies:

1, short selling securities or commodities.

2. Buying and selling stock indexes and stock options, futures or other financial derivatives and tools.

3. Invest with borrowed funds, increase investment, and achieve the goal of double return.

4. Use hedging and other methods to earn low-risk returns.

operate

In the initial hedging operation, the fund manager buys a put option with a certain price and term after buying a stock. The utility of the put option is that when the stock price falls below the price limited by the option, the holder of the seller option can hedge the stock held by his opponent.

Tickets are sold at the price limited by options, thus hedging the risk of stock price decline. In another hedging operation, the fund manager first chooses a bullish industry, buys several high-quality stocks in this industry, and sells several inferior stocks in this industry according to a certain proportion. The result of this combination is that if the industry is expected to perform well, the increase of high-quality stocks will exceed other stocks in the same industry, and the gain from buying high-quality stocks will be greater than the loss from shorting inferior stocks; If the expectation is wrong, the stocks of this industry will fall instead of rising, then the decline of the stocks of poor companies will be greater than that of high-quality stocks, and the profit of short selling will be higher than the loss caused by the decline of buying high-quality stocks. It is precisely because of this mode of operation that early hedge funds were regarded as a conservative investment strategy for fund management. But with the passage of time, people's understanding of the role of financial derivatives has gradually deepened. In recent years, hedge funds have been favored because of their ability to make money in a bear market. From 1999 to 2002, the average annual loss of ordinary Public Offering of Fund was 1 1.7%, while the average annual profit of hedge funds was 1 1.2%. There is a reason why hedge funds have achieved such impressive results, and their gains are not as easy as the outside world understands. Almost all hedge fund managers are excellent financial brokers.

Financial derivatives whose prices/trading volumes are used by hedge funds (for example, options) have three characteristics:

First, it can leverage larger transactions with less funds, which is called the amplification of hedge funds, which is generally 20 to 100 times; When the transaction volume is large enough, it can affect the price;

Secondly, according to Lorenz Glitz, because the buyer of the option contract has only rights but no obligations, that is, on the delivery date, if the exercise price of the option is unfavorable to the option holder, the holder can not perform it. This arrangement reduces the risk of option buyers, and at the same time induces people to make riskier investments (that is, speculation);

Thirdly, according to John Hull, the greater the deviation between the exercise price of the option and the spot price of the asset (specific subject matter) of the option, the lower its own price, which brings convenience to the subsequent speculative activities of hedge funds.

After hedge fund managers discovered the above characteristics of financial derivatives, their hedge funds began to change their investment strategies. They changed the investment strategy of hedge trading to manipulate several related financial markets through a large number of transactions and profit from their price changes.

At present, there are more than 20 investment strategies commonly used by hedge funds, which can be divided into the following five methods:

(1) long position and short position, that is, buying and selling stocks at the same time, which can be net long position or net short position;

(2) Market neutrality, that is, buying stocks with low stock prices and selling stocks with high stock prices;

(3) Convertible bond arbitrage, that is, buying convertible bonds at a low price and shorting stocks at the same time, and vice versa;

(4) global macro, that is, analyzing local economic and financial systems from top to bottom, and trading according to political and economic events and major trends;

(5) Managing futures, that is, holding long and short positions in various derivatives. The two most classic investment strategies of hedge funds are "short selling" and "leverage". Short selling, that is, buying stocks as a short-term investment, is to sell the stocks bought in the short term first, and then buy them back when the stock price falls to earn an arbitrage. Almost all short sellers borrow other people's stocks to make short positions ("long position", which means buying their own stocks for long-term investment). It is most effective to take a short strategy in a bear market. If the stock market rises instead of falling, and short sellers bet in the wrong direction of the stock market, they must spend a lot of money to buy back the appreciated stocks and eat into losses. Shorting this investment strategy is not adopted by ordinary investors because of its high risk. "Leverage" has multiple meanings in financial circles. Its English word basically means "lever". Usually refers to expanding one's capital base through credit. Credit is the lifeblood and fuel of finance, and entering Wall Street (financing market) through "leverage" has a "symbiotic" relationship with hedge funds. In high-risk financial activities, "leverage" has become an opportunity for Wall Street to provide chips for big players. Hedge funds borrow money from big banks, while Wall Street provides services such as buying and selling bonds and backstage. In other words, hedge funds with bank loans will in turn invest a lot of money back to Wall Street in the form of commissions.

Bidirectional operation

"There are many types of hedge funds in the world, including hedge funds focusing on gold investment, hedge funds focusing on oil investment and hedge funds focusing on bond investment. The most basic investment requirement is absolute income, that is to say, whether profit is a single income indicator; In contrast, traditional funds generally only pursue relative returns, that is, the level of returns relative to market indicators. For example, if they outperform the market, they will get relative benefits. In terms of operation methods, the former will use hedging tools for two-way operation, while the latter's operation direction is generally relatively single. "

Hedge fund madman

In terms of investment ideas, hedge funds can be divided into macro type and relative value type. The macro type is represented by Soros's quantum fund, which mainly analyzes macro dynamics and pays attention to the overall development trend of the market. Relative value hedge funds mainly invest in various stocks, securities and financial derivatives. The failed long-term capital management fund is a typical representative of this type. Because such funds can carry out leveraged financing, once the forecast is wrong, the risk is extremely high.

"When the overall rise, hedge funds can get investment income as long as they follow the broader market, but when they fall, they must hedge their risks in time, which is achieved by shorting investment." Hedge funds can "short-sell" the stocks they invest in when the stock price falls, and use high put options or blue-chip stock index futures to close their positions at a low level, so as to obtain the difference income to make up for the losses caused by the stock price decline. "The degree of risk should be assessed according to the portfolio. If you have a lot of stock portfolios, a stock portfolio is falling, but you still want to hold these stocks. At this time, you can short the market futures index and hedge this part of the losses and risks. "