Managers are typically unrestricted in their choice of investment strategies and have the ability to invest in any asset class or instrument. As such, managers target consistent, absolute returns rather than outperformance of a benchmark.
By utilising a range of investment strategies/financial instruments, and by being able to profit in both rising and falling market conditions, hedge funds have the ability to generate returns that have little correlation to traditional investments.
Hedge funds seek to limit against, and potentially profit from, declining markets by utilising various hedging strategies.
Hedge funds may be well positioned to deal with falling markets because they:
- Capitalise on declining market prices (through short selling)
- Use dynamic trading strategies
- Benefit from greater diversification and active asset allocation
When considering alternative investments, including hedge funds, investors should consider various risks including:
- Loss of investment
- Liquidity issues
- Use of leverage
- Speculative investment practices
- Difficulty valuing certain assets
- Higher fees
- Limited regulatory protections
As with any investment, hedge funds can lose money as well as profit. Investors should always seek professional advice before considering any investment.