Hedge Funds: the Advantages behind the Disadvantages

Today, stock market can offer you with several ways to gain more money; therefore you can choose the right type of investment that will be best for your need. In this article, we are going to explain about hedge fund. If you are a new investor, this term may sound strange in your ear, so for those who do not know what it is hedge fund and want to know more about it, you need to prepare yourself to read the article below.

Hedge funds originated as a vehicle to help diversify investment portfolios, manage risk and produce reliable returns over time. While hedge funds investor base has evolved over the years from individuals to institutions such as pensions, universities and foundations-their core goals have not. Hedge funds and pension plans have grown in recent year. Corporate employee retirement plans increasingly partner with hedge funds to help provide economic security and retirement benefits to millions of workers and retirees around the world.

Even though some people argue about the disadvantages of hedge funds, however, if you see deeper, the disadvantages of hedge funds are actually the advantages; here are some of hedge funds advantages.

Illiquidity

  • Empirical research argues longer lock ups of capital; longer notice periods, and less redemption frequencies all positively contribute to potential hedge fund relative outperformance.
  • Liability structures allow managers greater opportunities to invest in illiquid assets and less forced selling of assets in periods of market stress.

Lack of regulation

  • This makes it possible for investor to have more flexibility of investment strategies as regulation actually just decreases it.
  • Incremental legal and reporting costs ultimately borne by investors in more regulated products
  • Some studies show return advantages for private vs. regulated products

Lack of Transparency

  • For new and emerging strategy classes, ability to operate without being replicated can be major source of outsized and sustainable returns.

Lack of awareness by investors allows for difficult trades, such as shorting a thinly-traded security with lower risk of a force covering “short squeeze”

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