Money Market Funds • Hedge Funds • REITsAccording to the Encarta Dictionary, to hedge means "to take measures to offset any possible loss on a financial transaction, especially by investing in counterbalancing securities as a guard against price fluctuations."
And that's just what a hedge fund is designed to do — to minimize exposure to market risk and thereby boost investment returns. To do that, hedge fund managers employ a number of counterbalancing techniques, including combining long and short equity positions, investing in distressed or bankrupt companies, investing in derivatives (including options and futures contracts), and investing in privately issued securities.
But hedge funds have long been labeled as being highly risky investments — precisely because of the investment techniques their managers employ. Proponents counter that hedge funds — which typically seek positive returns irrespective of the overall market trend — are a good way to beat the market when compared to mutual funds, whose performance mirrors the overall market's performance.
Certainly, mutual funds are more popular than hedge funds, with more than $8 trillion in assets in the USA, compared to $1 trillion held in hedge funds. That could also be due to the fact that hedge funds are typically limited to very wealthy investors, with investable assets of more than $1 million.
The U.S. Securities and Exchange Commission recommends asking six questions when considering a hedge fund investment:
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Hedge Funds Guide