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What are hedge funds?

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Published on: Friday, December 11, 2009

I am confused about hedge funds as they have attracted a lot of bad press but other money commentators say they should be considered, albeit with caution, as a part of someone’s overall portfolio of assets. Could you explain what they do and whether they are risky? What do you think about them?

When the hedge funds were leading the charge to short-sell the stock market as the world’s financial system was on the brink of systemic collapse, I did often interchange the words — hedge funds and parasites — a number of times in the media. It was a tough call but their behaviour could have made a terrible financial problem even worse, even though they were doing what they were set up to do. The flipside is when we are booming and brokers and financial institutions talk up the boom, they do add to inflation and the eventual crash, but the controls of positive behaviour tend to be ignored. Anyway back to your question. Hedge funds are an investment fund and many do well in a falling market because they have a hedge strategy. Some investors who have their portfolio geared heavily to a rising market could use a hedge fund to take out insurance against a falling market. These funds won’t do as well in a rising market but when it falls they should come up with better results. There are short only, long only and long-short funds and their results will differ depending on what direction the market is going. They can be risky, but they can be quite safe. Some people give themselves a small percentage exposure to these funds for out-performance or for safety measures. Do you your homework on hedge funds before playing ball with them and go to www.fundmonitors.com.au for some good info on Aussie hedge funds. Also talking to a trustworthy adviser could be a good idea.

 

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Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. 


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