How Exactly Do Most Hedge Funds Make Money?

 Hedge funds earn from the fees they take from their investors for managing their money and also from the massive returns they generate by investing in various financial tools that are not readily accessible to the general public. Though the fees charged differs from one hedge fund to another, the strategies used to invest and generate returns are somewhat similar.

To give you more clarity on this topic, here are 4 strategies that hedge funds commonly use to make money and generate massive returns for their investors and themselves -

  1. The bull and bear strategy - The hedge funds that use this strategy usually believe in being the bulls or bears of a trade. This means they would buy a position in the financial market if they see a particular asset having the potential to rise and similarly, open a sell position if they find an asset that is dropping in value. This is also applicable in the derivatives market with the help of a call or put option; these are essentially contracts that give their holders the right, not a compulsion, to sell the underlying asset at a pre-defined price.
  1. The unmoved by the market strategy - Hedge funds, as said in their name, hedge their position in the market. This technically means to open a buy and a sell position simultaneously in an effort to achieve a neutral market exposure. However, do keep in mind that this involves a deep understanding of the financial markets to generate profit out of such an impartial investment strategy.
  1. The strategy of a merger - The majority of hedge funds include this strategy in their investment arsenal. This basically is the buying and selling of shares of a particular company before it is merged with another organization, in the hopes that after the merger, the new entity formed will have a valuation that aligns in the direction of the trade.
  1. The macro strategy - These hedge funds only focus on the macro-economic events and make their investment decisions based highly on the news that causes significant market movements.

I hope this answer helps you understand how hedge funds make their money.


Please Read The Original Post Here: How Exactly Do Most Hedge Funds Make Money?

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