What are the characteristics of hedge funds?
1 Complexity of investment activities
The main operating tools of hedge funds include futures, options and swaps. These increasingly complex and diverse financial derivatives increase the complexity of investment activities. Hedge funds can accurately obtain excess profits by matching these financial instruments in a complex combination.
2 amplification effect of hedge funds
Hedge funds can leverage larger transactions with less funds, and when the transactions are large enough, they can affect the price, thus maximizing the income. However, due to the leverage effect, hedge funds often face great risks of excessive losses in the case of improper operation.
3 the investment effect of high leverage
The high liquidity of securities assets of hedge funds makes it convenient for hedge funds to use fund assets for mortgage loans. The existence of this hit effect makes the net profit after deducting loan interest from a transaction far greater than the possible income from simply using capital.
4. Private financing methods
Because hedge funds are mostly private, they evade the strict requirements of American law on information disclosure of public offering funds. Due to the high risk and complex investment mechanism of hedge funds, many western countries prohibit them from publicly recruiting funds to protect the interests of ordinary investors.
It should be noted that hedge funds and securities investment funds for ordinary investors not only have great differences in fund investors, fund raising methods, information disclosure requirements and supervision, but also have many differences in fairness and flexibility of investment activities. Hedge funds, on the other hand, have no investment restrictions and definitions at all, and can use all operational financial instruments and combinations to maximize the use of credit funds and obtain excess returns higher than the average market profit.