How hedge funds help to minimize the risk

How hedge funds help to minimize the risk of investment

What are Hedge Funds ď‚— Hedge funds are an alternative investment fund. They are a

popular AIF investment vehicle used largely by institutional investors and HNIs. AIF investment in India has been increasing largely in the past decade or so, and hedge funds a major role to play in their increasing growth ď‚— Just as in case of mutual funds, hedge funds also comprise a pool of underlying securities that make up the AIF fund.

Moreover, India hedge funds can invest in various types of securities just the way mutual funds would. However, as investors, a very important thing that one must remember is that there are many factors that differentiate hedge funds from mutual funds

Key features of hedge funds ď‚—One of

the key features that characterizes hedge funds is that they invest in long and short positions through well-defined long-short strategies. Therefore, they use the investor corpus for buying stocks. Moreover, hedge funds also indulge in selling stocks in order to buy them back at a later date when the stock prices would have ideally dropped ď‚—Many hedge funds in India invest their corpus in derivatives contracts. These include futures and options (F&O). The purpose of them doing this is to either buy a security or sell a security at a specific price

Why do you need to invest in a Hedge Fund?  A hedge funds manager uses leverage as a popular

investment technique. This becomes an integral part of the hedge fund’s investment strategy, which involve sparking the borrowed corpus in lucrative avenues to increase the fund’s returns potential. However, one needs to note here that this could also lead to higher risk of incurring losses  Therefore, to mitigate investment risks, hedge funds keep their basic objective as that to increase gains by investing the borrowed corpus in a manner that enables them to offset losses. Therefore, hedge funds use high-end investment techniques and methods for hedging their overall investments in order to mitigate risks

ď‚— This is precisely the reason that hedge funds provide the

investors with a robust alternative investment option, which will help them balance the risks associated with traditional investments such as stock market sell-offs. Their investment techniques enable hedge funds to work out the possible risks in the form of capital loss. Therefore, this puts hedge funds in an advantageous position, which enables them to manage investment risks effectively by attempting to limit their investment losses ď‚— Hence, hedge funds are a highly effective way for investors to diversify their investment portfolio for deriving more consistent returns from their overall investment, while mitigating their investment risks

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