In this era of technological sophistication, the investment sector is increasingly being targeted by entrepreneurs. And one of the investment methods, namely hedge funds, is tempting because it invites large profits and can be flexible to run in economic conditions that are strong or weak. How can it be like that, what exactly is a hedge fund that turns out to be popular in developed countries?
Come on, find out the details in the article below. Hopefully this article helps those of you who are thinking about the best investment for yourself.
What Are Hedge Funds Like?
Hedge Fund definition can be seen from the meaning of the term. Hedge fund consists of the word hedge which means hedging or protecting money, while the word fund means funds. So, if you combine hedge funds, it means protecting money.
When viewed from its activities, a hedge fund is an alternative investment method that collects private funds or private investment partnerships from entrepreneurs who have large incomes managed by fund managers who are credible, capable, wealthy and experienced by using leverage (loan funds).
From this definition, it can be seen that the purpose of hedge funds was created to protect investment assets so as to avoid the risk of large losses with large capital from investors. In addition, hedge funds are supported by fund managers who have sharp analysis to determine the right strategy to make as much profit as possible.
In addition, the goal of hedge funds was created to increase returns for investors. Yields in the form of interest gains or dividends from assets that have been invested. The nominal yield will be distributed according to the amount of investor capital. So, the bigger the investment invested, the bigger the yield will be.
Most importantly, the goal of the hedge fund is to generate maximum profits. This investment method is already popular and trusted by many customers so that it can motivate many customers to compete for higher profits, so the potential for a very large and promising return on funds.
History of Hedge Fund Creation
Behind its popularity, there is a history of hedge funds that surrounds its existence to this day. The pioneer or creator of hedge funds is Alfred Winslow Jones who is also known as the Father of Hedge Funds. The first time he came up with the investment idea was when he wrote an article about investment trends for Fortune.
His writings encouraged Alfred to directly practice money management. In the early years of the hedge fund’s founding in 1949, he raised $100,000 with $40,000 of his own money.
He manages the fund by minimizing risk by selling other stocks which is now better known as the long-short equity model and also utilizes leverage to increase profits.
Then in 1952, Jones changed the investment model from a general partnership to a limited partnership and there was an additional 20 percent incentive fee for managing managers. Over time, the hedge fund model has grown rapidly to date.
Based on data from the HFR group, it is known that there are more than 15 thousand hedge funds worldwide with a total managed fund of $ 3 trillion.
How is the Hedge Fund Structured?
You already know that hedge funds aim to get maximum profit with large capital. Well, to support the achievement of that goal there is a hedge fund structure. From looking at this structure, you can also distinguish hedge funds from mutual funds or mutual funds, you know.
1. Investors have middle to upper economic levels
If in a mutual fund or mutual fund anyone can become an investor, this does not apply to hedge funds.
Investors in hedge funds are recognized or accredited, if they have earned $200,000 (equivalent to Rp. 2.8 billion) in the last two years or have a net worth of more than one million dollars. This is necessary to ensure that investors can take the risk of investing unregulated in those securities.
2. Run by a professional Fund Manager
This fund manager acts as a manager of money to be invested optimally so as to produce maximum profits.
A fund manager qualification in a hedge fund includes someone with technical knowledge, such as derivatives analysis to generate returns, asset buying and selling skills to come up with equity hedging strategies, trading tactics, and arbitrage where they take advantage of price inefficiencies in an asset.
So do not be surprised if in this hedge fund investment there are costs incurred to appreciate the performance of the fund manager. Fees for annual asset management range from one to two percent and there are intensive fees ranging from 20 to 50 percent of the amount of funds managed.
Thus, it is hoped that management can work to outperform and generate better profits.
Meanwhile, mutual fund investment managers are only given a performance fee of one percent which is determined annually from the amount of funds managed.
3. Many choices of forms of investment
In mutual funds, the form of investment is limited to the money market or stocks. In contrast to hedge funds, which open up many investment options, such as stocks, property, foreign currency, commodities can even be land, houses or fiat currency.
4. There is a leverage system
The last hedge fund structure is a leverage system or simply called a loan fund. These funds are used by investment managers to increase returns from investment activities to get more returns and can reap profits from assets whose price is higher than their original value or vice versa. Thus, it can answer or adapt to changes in market investment conditions.
What are the Pros and Cons of Hedge Funds?
Now that you know the ins and outs of hedge funds, are you interested in investing with that method? Before you decide, first, get to know the advantages and disadvantages of hedge funds as follows:
Advantages of Hedge Fund Investment
- Free to choose various forms of investment as needed;
- huge profits;
- can be used for long and short term investment;
- have a sharp strategy analysis;
- operational matters are run by professional managers who are credible and have mature experience
Disadvantages of Hedge Fund Investments
- To start investing requires a large amount of capital, even though mutual funds can start from IDR 100,000;
- spend a lot of investment costs for asset management 2% and 20% performance manager fee;
- less flexible because money must be kept for 1 year with profit withdrawals in a certain quarter, while withdrawals from mutual funds can be withdrawn at any time;
- limited to entrepreneurs who have large capital;
- the potential for failure is quite high.
The final word
How? Is a hedge fund the next investment alternative for your portfolio? The most important thing is to consider carefully before making a big investment decision by taking into account the things described above.
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Author: Muhammad Zaki Fajrul Haq
Follow me at @mzfajrulhaq (Instagram) or @ZakiFajrul (Twitter).