What is a Hedge Funds

Using a wider range of investment activities and trading capital, hedge funds are typically only open to regulators. Typically they are only available to universities, institutions and really rich people. Because of this, the regulators of a hedge fund typically have a greater knowledge of the fund class, and can invest in liquid assets more wisely than a typical investor. This level of sophistication tends to result in a higher operating cost than other investments, but can yield much greater returns in the long run. The investments are considered open ended, allowing investors to add and withdraw money at regular intervals. Hong Kong is a growing center for hedge fund activity, as this type of investments is very lucrative and appeals to the many massive corporations that are based out of Hong Kong.

Generally set up as a private investment partnership, hedge funds have a limited number of members, and require massive start up capital to join. In the US, a hedge fund must earn a set amount of money annually, and they require at least 1 million dollars to set up. Because of the sophisticated amount of knowledge a member of a hedge fund must have, they are unregulated investment options. In Hong Kong this is beneficial to investors as a hedge funds goal is to minimize the risk or loss that can occur with investments, while earning a positive return. The amount of the return is either added back to the investment as a gain, or sold as dividends to individual hedge fund entities.

As hedge funds are considered a private entity, and not sold to retail investors or the public, hedge funds typically do not have the same restrictions on how they operate or are structured. This is very beneficial to Hong Kong investors as it allows them to structure the terms of their investment without having to report the structure. This gives a certain amount of privacy in terms of earning potential and market power. Because of this certain freedom, hedge fund managers can choose the amount they charge for their services. The norm is 2% of the net worth of the fund, though it can be as low as half a percent up to 5%. The fund managers also charge a performance fee, with the typical amount being 20% of the funds earning per year.

               

In Hong Kong there are four major strategies that fund managers employ, though with the rapidity of developing strategies and theories, they rarely use just one, but rather a combination of strategies. Global macro takes sizable investments counting on a particular change with the global macroeconomic environment. Directional investing takes advantages in shifts in the market to make the most money. Event driven strategies utilize world events or situations that enable the investors to capitalize on worldwide events. Finally, relative value takes advantage of the inequalities of the price of some securities. Again, while as a whole a fund manager can use all four strategies, typically they use a combination of strategies to ensure maximum returns on their investment capital.