What is a hedge fund?
Hedge funds don't have a single, agreed definition. However, the phrase "hedge fund" generally refers to a private investment company that makes investments in a variety of assets and uses a wide range of investment strategies. Due to their inherent characteristics, hedge funds are almost unrestricted in their use of leverage, derivatives, and short-selling. In comparison to the more strictly regulated mutual funds, this mix of capability, tools, and flexibility in their investing selections makes a major difference.
Additionally, the combination of these assets has made it possible for hedge funds to take advantage of fresh market possibilities through investment techniques.
Investment strategies
Regarding the amount of investing techniques employed by hedge funds, there is also no agreement. The world of investment assets is expanding and financial technology is continually improving. In order to take advantage of market opportunities, new investing techniques are always being developed. Even hedge funds that invest in similar asset classes may attempt to make money by exposing themselves to various risk variables. For instance, a hedge fund investing in convertible bonds might be looking to gain exposure to interest rates, volatility, equities, credit, or a combination of these factors. Different tactics could be used to take advantage of the exposure to each of these factors. It is crucial to understand that different tactics offer varying levels of risk and return.
Hedge fund indexes
Although there is no legal requirement for hedge funds to share their financial information, most do so at least regularly to draw in new investors. Some data providers have created performance hedge fund indexes and sub-indexes based on the fund strategy using this information.
Several of these data sources include:
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1. Hedge Fund Research (HFR)
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2. Zurich Capital Markets
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3. CSFB Tremont
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4. Hennesse
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5. Tuna
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6. Barclays
Investment strategies and indexes
Some of the HFR sub indexes can be used as substitutes for hedge fund strategy performance.
HFR has created a number of benchmark indices that use equally weighted composites of constituent funds to reflect the performance of the hedge fund industry. The funds chosen for each index are screened according to managerial due diligence and other standards of quality. Statistics, cluster analysis, correlation analysis, optimization, and Monte Carlo simulations are used to classify data. The HFR website has access to this information.
The survivorship bias in the hedge fund indexes is one of the primary issues. Many hedge funds that were once included in the indexes may no longer meet the rules or may have gone out of business. By attempting to track a fund's performance up until its eventual liquidation, HFR attempts to reduce this issue.