What are the Features of a Hedge Fund?

What are Hedge Funds?

Hedge funds are a type of fund that actively participate in numerous other features than just buying and selling securities.

  • A hedge fund may take short and long positions, trade options or bonds, deal in undervalued securities, and invest in any market activity where there is an opportunity for gains.

  • A hedge fund, therefore, is a fund that is open to all kinds of investments in the market. Its sole aim is to earn profits from the market activities in wherever form it may see fit.

Strategies of Hedge Funds

Strategies of hedge funds usually differ depending on the nature of investment and returns.

  • Hedge funds are also used to reduce the risks of an underlying asset. Strategies of hedge funds differ with volatility, risks, and returns.

  • For example, some hedge funds may only hedge against market downturns, while others may invest in global shares, bonds, foreign currencies, and options.

  • The point to note here is that global hedge funds are not quite common, only 5 percent of all hedge funds are global in nature.

Features of Hedge Funds

Some notable features of hedge funds are −

Positive Returns

Many hedge funds have the capability to use the market trends and generate positive returns from the positive or negative mode of the market. These hedge funds usually act as an agent and do not actively get purchased in the process, but only act as an enabler.

Diminish the Overall Risk

Hedge funds are used in a portfolio to diminish the overall risk of an investment basket. As hedge funds can be used to churn out the required amount of returns, they help in reducing the overall risks of a portfolio by reducing the volatility and increasing the returns.

Wide Choice

There are many types of hedge funds - some of them often uncorrelated with one another - that may be used to reduce the risks or increase the returns. Hedge funds are available for almost all types of investments that can be used for any given purpose in a share-market strategy.

High Returns

It has been proved that hedge funds offer more returns and carry less risk that can augment the investors’ overall aim to grow the portfolio. Hedge funds have often been used by fund managers to reduce the overall risk of an investment project.

Ideal Investment

Hedge funds do not rely on the time of entry or exit and so they are an ideal investment vehicle for investors who do not have an exact entry and exit policy. This is particularly helpful for individual investors who do not have an ideal strategy of investment in their hands.

Better Diversification

Hedge funds increase the overall flexibility of an investment portfolio which directly impacts the diversification approach. Better diversification reduces the cost and risk of a project.


Many investors tend to invest in hedge funds for their inherent capability to provide a cushion against unwanted risk in the market. Provided an accurate policy is adopted while having a hedge fund, the investors can earn a good reward from it irrespective of the time and amount of investment.

Updated on: 25-Mar-2022


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