What are the risks of hedge funds?
Hedge funds are called funds, which are essentially different from mutual funds in terms of security, expected annualized expected returns and appreciation. The Fund uses various trading methods (such as short selling, leverage, program trading, swap trading, arbitrage trading, derivative products, etc.). ) to hedge, transpose, hedge, and make huge profits. These concepts have gone beyond the traditional operation scope of preventing risks and ensuring expected annualized expected returns. In addition, the legal threshold for initiating and establishing hedge funds is much lower than that of mutual funds, which further increases the risk. In order to protect investors, the securities management agencies in North America classify it as a high-risk investment category, and strictly restrict the participation of ordinary investors. For example, it is stipulated that each hedge fund should have less than 100 investors and the minimum investment is $6,543,800+0 million.
How do hedge funds make money?
In the most basic hedging operation, the fund manager buys a put option with a certain price and term after buying a stock. The utility of put option is that when the stock price falls below the option-limited price, the holder of seller option can sell his stock at the option-limited price, thus hedging the risk of stock 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 expected annualized expected return of buying high-quality stocks will be greater than the loss of 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.
Because of this mode of operation, the early hedge fund can be said to be a form of fund management based on the conservative investment strategy of hedging.