Independent Financial Advisors - IFA Bolton, UK

Hedge Funds (sometimes known as total return funds or alternative investment strategy funds) aim to produce positive returns irrespective of market conditions.

There any many different hedge fund strategies. Some managers use stocks and shares, while others use bonds or other asset classes. Many hedge fund managers incorporate sophisticated financial instruments (such as derivatives) into their strategy with a view to reducing (or hedging) the risk while producing a sufficiently large positive return.

The key difference between a traditional stockbroker investing in shares and a hedge fund manager using equities is likely to be the risk adjusted return. For example, while a stockbroker may be pleased to see his client’s portfolio reduced in value by, say, 6% if the stock market has fallen by 10%, the hedge fund manager is only interested in positive returns and can take action to neutralise the effect of stock market fluctuations through the use of financial instruments.

Some hedge fund managers will also use stop loss policies so that, for example, if they lose say 2% in a week, they will move into cash until they are confident that they can make money for their clients by investing elsewhere.

At one end of the scale are the managers of risky hedge funds that are seeking high returns but with a commensurate high risk. At the other end of the scale are those managers who are seeking to beat cash returns and make a profit but with few loss-making months.