A Hedge Fund is a private pooling of funds with little regulatory intervention on the government. A Hedge Fund uses an arsenal of investment techniques with a goal to generate a higher return for a stated amount of risk than what can be expected from a normal investment.
Hedge Funds are managed to earn a consistent level of return despite reducing the risk associated with it. Although risk can be construed as a function of the return, a Hedge Fund Manager finds a way to reduce risk without cutting into the investment income.
Since the 90s (in Australia), Hedge Funds have been recognised for its potential impact in the Australian Financial Markets attributing to the increased growth in management of the Australian assets and the diversity of the tactics employed by them.
Simply put, Hedging is like a form of insurance which is like paying a small price against a probable loss. If you have an investment, Hedging is buying something else to offset a possible loss in that investment.
The major impact of the Hedge Funds in the market is that they sell short. Short selling by its very idea is speculative. Thus, the growth of Hedge Funds in the market injects a much larger speculative element in the market.
The Australian Trade Commission has stated in its September 2010 report that the Australian Hedge Funds has $ 140 billion to GDP. Some of the prevailing Asset Management Companies adopting hedging techniques are K2 Asset Management, Platinum Asset Management, and Blue Sky.
Given the risk involved, the Australian government, through ASIC in 2013, introduced a guide to improving disclosure to investors regarding the issue and sale of Hedge Funds.
Hedge Fund Management firms typically charge a management fee and a performance fee. The management fee is calculated at a set percentage of the NAV of the fund. At the same time, performance fees are calculated on the profits earned by hedging such funds.
To hedge an exposure to anything, you need to establish a correlation between that asset and other assets. However, considering the practicalities in situations involving cryptocurrencies, it would be unrealistic as they do not seem to behave in accordance with regular financial instruments, and conventional market sentiments do not drive them.
The coronavirus epidemic has changed the work practices of fund managers. The investment managers have leveraged the growth of technology through utilising one of its greatest gifts, remote working capabilities, redesigning the future of the work environment itself.
The future of the next decade for hedge fund firms is that they would employ machine learning, big data, and ultra-high frequent trading (HFT). Another possibility is the loosening of restrictions concerning those who are eligible to invest in Hedge Funds.
