A hedge fund is a fund with freer investment rules whose goal is to create a positive return regardless of how the market develops (so-called absolute return).
By Viktor, co-founder of Bifrost - Aug 12 2019
A hedge fund is a fund with freer investment rules whose goal is to create a positive return regardless of how the market develops (so-called absolute return). They are also called market-neutral funds and were created to reduce the risk and protect the capital.
This type of fund is often advertised as a way to increase the portfolio's return while reducing risk. This is a difficult task, as a certain level of risk is required to generate returns. And the fact is that hedge funds as a group have not performed particularly well in recent years, and therefore received a lot of criticism.
Hedge funds are quite special, and the fact is that much can be different between different hedge funds. The fund's strategy controls the level of risk in the fund, and there are hedge funds with high risk but also those with low risk.
The management fee for a hedge fund is generally high, and additional fees may also be added depending on how well the fund performs. It is common for a large part of the total fees to be charged in the form of a so-called performance-based fee.
What types of hedge funds are there?
As I mentioned, there are a variety of different types of hedge funds, and the fact that they have very free placement rules makes it very difficult to mention all different types.
We would like to avoid generalizing because there is such a large variation in how a hedge fund can be structured.
However, if you would like to know more about what types hedge funds exist, then you can go into your bank or online broker and check which hedge funds are available there. Skim through them and read the concise version of what their overall strategy is. That way you should get a pretty good picture of which options are available to choose from.
Important things to consider with a hedge fund
They are generally expensive when it comes to the annual management fee. The majority of all hedge funds also have a performance-based fee, for example. whether they hit a benchmark or perform better than the fund's history.
Therefore, be sure to pay extra attention to the size of the fee, as well as any additional charges that may apply depending on whether different conditions are met. It is important to keep down the costs in the long-term, as the compounding effect applies to fees as well as gains.
You have to be careful when reading about hedge funds because they differ so much. They can have very different strategies and risk levels, and therefore your research becomes much more important than when, for example, you look at a stock or a fixed income fund.