Tower Managed Funds says that investors are increasingly incorporating hedging funds into their investment portfolios in an effort to smooth out returns in a difficult investment climate. Up to 5 - 10% of some investors' overall investments are now in these funds as familiarity with them moves them into mainstream investment decisions.
Maximise return - minimise risk
The primary objective of a hedging fund is to maximise return
and minimise risk - achieving capital growth irrespective of the
conditions in the share and/or bond markets, while controlling
all risk factors as much as possible. Successful hedging funds
- sometimes referred to as trading funds - are offered by experienced
fund managers who utilise their knowledge, experience and understanding
of markets and economics to pursue opportunities in buying and
selling bonds, currencies, commodities, shares, options and futures
markets.
The objective for a hedge fund manager is to generate absolute returns independent of the conditions in the financial markets. Fund managers typically allocate a portion of funds to cash (or equivalent assets) before investing the remainder using financial instruments such as forward contracts, swap contracts, options and futures to take long or short positions in particular markets.
A good hedging strategy will potentially provide the investor with safe leverage and healthy returns, widening a portfolio's investment opportunities while helping to increase returns.
Planning an effective investment portfolio is all about maximising return - not only by investing in assets that have the potential to do well, but also by "covering the bases" to ensure that if one sector does not perform well, then the negativity is eliminated by better returns elsewhere. This is the fundamental reasoning behind having hedge funds as part of a balanced investment portfolio.
There is little doubt that the rewards and reduced volatility offered by hedge funds can be significant.
Summary: Advantages of Hedge Funds in a Balanced Portfolio
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