As they say, it can pay to “hedge your bets”
Despite the quirky name, hedge funds are not connected to horticulture or gardening. The eZonomics story What is … a hedge fund? tells how in the middle of last century, American investor Alfred Jones coined the term “hedged fund” to describe a strategy of including investments that hedged against losses in other parts of his portfolio. Over the years, the term has risen in prominence – but the funds are not without controversy. Hedge funds are often considered very high risk investments and are not typically held by ordinary households.
Hedge funds often short sell
Traditional investment funds use investors’ money to buy assets, such as shares and bonds, with a view to the value rising over time. This is known as going “long”. Investors can also buy contracts that produce a profit if the price of an asset falls. This is known as going “short”. Hedge funds often use short investments as part of strategy to make money when they believe an asset price will fall. At times, the funds might invest in risky markets (such as credit derivatives) that more traditional funds avoid.
Understand your appetite for risk
Knowing how hedge funds work might be useful for investors – but, like all investing, think carefully before putting money in. They are typically highly risky, can have high fees, and are used by institutions or very experienced, wealthy individuals. The video tutorial What are the basic investments products? offers information on getting started in investing, including the return and risk characteristics of cash, funds, bonds and shares.