It would be fair to say that hedge funds have exploded in popularity over the last few years. Once regarded as something which pretty much everyone had to look up a definition for, now this isn’t always the case. They are well-known in financial circles, and many investors are making tidy profits from them.
Something which is still slightly complicated is the fact that there are so many types of hedge funds. Unfortunately (or fortunately, depending on how one looks at it), there are many around and a quick glance at jcragroup.com/hedging-solutions/ highlights this.
Following on from the above, we will now take a look at the different types of hedge funds that are available and note which circumstances they are useful in. As you will soon see, some carry more risk than others, but as is often the case this comes with higher potential rewards.
This can be one of the most interesting types of funds to invest in, but at the same time it can carry a lot of risk.
As the name may indicate, this is all about buying stocks in companies who are struggling. Unfortunately, there can be occasions where they are struggling just a little bit too much, and this can mean that they face bankruptcy which obviously puts a huge risk to your investment.
In terms of the types of investments, they tend to fall into the categories of bonds, bank debt or trade claims. The big advantage of these is that due to the fact that they are struggling, you won’t pay so-called market value. The prices will be lower, and this can result in bigger profits for you later down the line.
Another interesting fund comes in the form of emerging markets. This time, it doesn’t focus on companies specifically, but more so companies in countries which are slow in development. In definition, this means those countries which have a low to medium per capita income.
Again, there is a greater element of risk in these funds. After all, these are hardly stable countries, yet the “emerging” factor means that great profits can be made if they progress accordingly.
If you are looking to turn to something which has much less risk, let’s introduce the market-neutral funds. This is all about hedging against any market movements and the low-risk factor comes because they will generate profits regardless of the market environment. In other words, whether it is trending upwards or downwards, they are still likely to turn a profit.
If we finish with macro funds, these tend to cover everything from bonds, to commodities to stocks. The basis of these funds is again in the name; the price of them will change based on the macroeconomics. Therefore, it won’t come as a surprise to hear that the risks are higher than other funds, as investors are effectively gambling on events that are poised to hit a particular market.