Hedge Funds & Alternative CIS

A hedge fund is a privately offered, pooled investment vehicle run by a professional manager who has wide discretion over strategy. Despite the name, a hedge fund does not necessarily 'hedge' — the label is historical.

Its defining feature is an ABSOLUTE-RETURN objective: it aims to make a positive return regardless of whether markets rise or fall, rather than simply beating a market benchmark (a RELATIVE-return goal typical of a traditional long-only fund).

To pursue that goal the manager uses techniques that mainstream retail funds are usually restricted from or limited in using:

• •LEVERAGE — borrowing money or using derivatives to take exposure larger than the fund's own capital, magnifying both gains and losses.
• •SHORT-SELLING — selling borrowed securities to profit from a price FALL, so the fund can make money in falling markets.
• •DERIVATIVES — options, futures, swaps and forwards used to hedge, gain exposure efficiently, or add leverage.
• •LONG/SHORT positioning — holding long positions in assets expected to rise while shorting assets expected to fall.

Hedge funds sit within the broader category of ALTERNATIVE investments — assets and strategies outside traditional long-only equities and bonds.

A long/short fund is long some securities and short others at the same time. The mix determines its NET market exposure.

If long and short positions are roughly equal in size the fund is close to MARKET-NEUTRAL, aiming to profit from the relative performance of its picks (the longs beating the shorts) while largely removing broad market direction as a risk.

A fund can also run a net-long or net-short bias depending on the manager's view. Short exposure lets the fund seek returns when markets fall — a key contrast with a long-only fund, whose only defence in a downturn is to hold cash.

Shorting introduces its own risk: because a price can rise without limit, the potential loss on a short position is theoretically UNLIMITED, unlike a long position where the most you can lose is your outlay.