Understanding Hedge Funds
Hedge Funds 1: What is a Hedge Fund?
by Mika Hamilton
All investors are looking for the most time efficient ways to make the most money. For those individuals who have a bit of extra money to spend, hedge funds may be just the way to make money fast.
The establishment of hedge funds date back to the late 1940s and were developed by Alfred Jones who was the father of unorthodox investment techniques.
One of his most successful techniques was selling short stocks while buying long stocks. This is the basis for how a hedge fund operates. Due to the number of guidelines associated with Hedge Funds it requires much more money then normal stock vehicles.
Hedge Funds guide investors in making a profit in high risk investments. Hedge Funds use technique called leverage. This is when the capital from a company's investors is combined with borrowed money from a bank.
The fee associated with Hedge Funds is called a incentive fee. This is a fee based on a portion, instead of a percentage, of the clients profits. The fee is actually re-invested in hopes of making the company even more money.
For the most part companies own Hedge Funds. Most people do not have enough money to meet the minimum initial investment to have their own Hedge Fund. In 2004 alone Hedge Fund investments passed one trillion dollars. By the middle of 2004, 39 companies held 1.1 trillion dollars in their Hedge Fund.
Making a profit from a Hedge Fund is all about the timing. The best time to invest in a Hedge Fund is when a company that owns one is merging with another company.
If you know a merger is going to take place, buy a large amount of shares in the company that is going to merge. Once the merge takes place the values in these stocks increase dramatically.
This is an extremely high risk investment because mergers that are often rumored to happen never do. The activities of companies are often unpredictable.
Selling short is another great way to turn a profit on merging companies. This takes advantage of the difference between present market price and the high purchase price in the event that mergers does take place.
Hedge Funds are extremely beneficial because of their level of security. Hedge Funds that belong to companies are kept private. This type of investment takes place between a company and individual – the government and other companies are not involved.
Hedge Funds do not need to file with the SEC and are usually based in place that have less regulations like the Cayman or Virgin Islands. Due to the secrecy Hedge Funds are often believed to be illegal and unethical.
However, this is simply not true. Hedge Funds are a legal way to make a great profit. Remember investing in Hedge Funds takes a great deal of money and it is an extremely risky investments. However, the immense pay off can change your life forever, and certainly it is a risk that many people are willing to take to be financial secure.
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