What are Hedge funds? Are they risky?

For investors who are looking for High Risk and High Return appetite, the Hedge Fund is a very beneficial option. However, investors who play in millions and billions of dollars does face some challenges. After the financial crisis of 2008, issues related to hedge funds have significantly risen. Investors those who are investing in Hedge Funds need to be qualified, aware of investment risks and are willing to take risks for large returns. To protect their investors, Hedge fund appoints a “risk officer” for management and assessment of risks without getting involved in formal portfolio risk models, some of which are mentioned below:
  1. Investment Risks
Hedge funds include several risks such as Manager Risk and Liquidity Risk. Liquidity means how rapidly security can be transformed into cash. Generally, to restrict the investor from exiting the fund or withdrawing money, funds develop a lock-up period. During this period liquidity opportunities might get blocked for almost 1-3 years. Losing the entire money is another risk associated with the hedge fund investment. The Offering Memorandum of hedge fund says that investors should be able to take the burden of losing the entire investment if unforeseen circumstances arise.
  1. Concentration Risk
In this type of risk, risk involves investing in a restricted area for enhancing the returns. However, these risks can be conflicting for investors who expect huge diversification of funds for enhancing funds. For investing in FMCG sector the investors might have a defensive technique. However, if the macroeconomic conditions are heavy like high input costs, inflation, less spending, will stimulate a downward spiral for the entire FMCG sector hampering the overall growth.
  1. Performance Issues
After the financial crisis of 2008, the charm of the hedge fund seems to be worn out a bit. Factors responsible for such downfall are- credit spreads, interest rate formation, stock market volatility, government and leverage intervention which creates obstacles and reduces the opportunity for even the skilful of fund managers. One of the key areas is, volatility, from where the hedge fund earns an advantage. However, since 2009 the volatility index is steadily declining. The overabundance of investors might be a reason for the deterioration in performance.
  1. Regulatory and Transparency
Hedge funds are private agencies disclosing very less information to the public which is perceived as a ‘lack of transparency' by the community. If compared to other investment managers, the hedge fund managers aren't subjected to rigid Registration requirements and/or regulatory oversight. Presence of such features opens the door for fraudulent activities such as mismatch of handling, faulty operations, etc. however, the US government and EU is pressurizing the fund to add information improving transparency.
What are Hedge funds? Are they risky? What are Hedge funds? Are they risky? Reviewed by Newzpot on 03:52:00 Rating: 5
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