Tuesday, August 21, 2007

HEDGE FUNDS


A few years ago, hedge funds could hardly be noticed in the Indian marketplace, and they were highly secretive investment vehicles even in the U.S. Today, India is being looked upon as a potential investment ooportunity.The stock market in India is booming and so are the investments from abroad in the form of FDIs and FIIs.
With a number of deals being struck in the country, hedge fund players are ready to experiment with the kind of upside that might be possible in this market.

What is a Hedge Fund?

A hedge fund is a fund that can take both long and short positions, use arbitrage, buy and sell undervalued securities, trade options or bonds, and invest in almost any opportunity in any market where it foresees impressive gains at reduced risk.
Some features of hedge funds include:
Alfred Winslow Jones started the first known hedge fund in 1949
Only high net worth individuals and institutional investors invest through them
The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions.

Some of the hedging strategies available to hedge funds:
Selling short - selling shares without owning them, hoping to buy them back at a future date at a lower price in the expectation that their price will drop.
Using arbitrage - seeking to exploit pricing inefficiencies between related securities - for example, can be long convertible bonds and short the underlying issuers equity.
Trading options or derivatives - contracts whose values are based on the performance of any underlying financial asset, index or other investment.
Investing in anticipation of a specific event - merger transaction, hostile takeover, spin-off, exiting of bankruptcy proceedings, etc.
Investing in deeply discounted securities - of companies about to enter or exit financial distress or bankruptcy, often below liquidation value.

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