Chapter 7: 8 Flashcards
What do hedge funds hedge against?
Price risk
How do hedge funds profit?
They attempt to profit regardless of general movements of the market, by selecting a combination of asset classes.
What asset classes do hedge funds use?
- Derivatives (long and short)
What is a ‘naked’ short position?
Involves selling of shares which the fund doesn’t at that time own in hope of buying them back more cheaply if the market falls.
Why is hedge fund access restricted to wealthy investors and institutions?
They have high initial investment levels, meaning access is restricted to wealthy investors and institutions.
How else can people access hedge funds?
Through the funds of hedge funds.
What aspects are common of hedge funds?
- Structure
- High investment entry levels
- Investment flexibility
- Gearing
- Prime broker
- Liquidity
- Cost
What’s meant by structure?
Most hedge funds established as unauthorised and are unregulated CIS. Thus, cannot be generally marketed to private individuals as they’re considered too risky.
What’s the minimum initial investment for hedge funds?
Minimum £500k to £1m+.
What’s meant by investment flexibility?
Lack of regulation so can invest in whatever asset classes, e.g. long and short positions in bonds, equities, commodities, and currencies.
What investment style do hedge funds typically take?
Absolute returns.
What’s meant by absolute returns?
Positive returns regardless of the general direction of market directions.
What is gearing?
Hedge funds borrow funds and use derivatives to enhance their returns.
What is meant by prime broker?
Hedge funds buy and sell investments, borrow and entrust safekeeping of assets from one main wholesale broke - called their prime broker.
What is meant by liquidity?
To maximise investment freedom, hedge funds impose an initial ‘lock-in’ period before investors can sell on their investments.
