Hedge Funds And Its Strategy Classifications

992 Words Apr 20th, 2015 4 Pages
As of 2014, more than 11,000 hedge funds are managing more than $2.6 Trillion in assets (De Pol, 2015). The statement itself speaks how important these hedge funds are in the global financial market. They provide investors with opportunities to achieve gains and manage risks. Hedge funds provide liquidity and make financial markets more efficient. These funds can be operated with extreme flexibility and play an important role in financial innovation and reallocation of financial risk (Rubin et al, 1999). Although it sounds good, hedge funds took a hit during the 2008 crisis. Along with the credit crisis came Madoff fraud, the biggest investment scam in 2008. Investors started looking at these funds as high risk, highly
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Hedge fund is not a new form of investment. It is said to have been used first in 1949 although it is not defined statutorily (Rubin et al, 1999). Since, it is unregulated; hedge fund can invest in a wide range of securities than mutual funds can. Hedge funds do invest in traditional securities like stocks, bonds, commodities, etc., but it is known for using more sophisticated investments and techniques.
There are two main types of hedge funds. Onshore hedge funds which are located in New York, London and areas of Americas whereas offshore hedge funds are limited liability corporations or partnerships setup in tax havens such as the Bahamas, Bermuda or the British Cayman islands, in order to minimize tax liabilities. Offshore funds tend to offer more flexibility as they offer more privacy, enjoy certain tax advantages, and are not restricted as to the number of investors. One of the more innovative offshore fund structures which allows for both off-and-onshore investors is a Passive Foreign Investment Company (PFIC). PFIC is a fund that accepts both offshore and onshore investors but must maintain at least a majority of offshore investors’ assets in the fund at all times (Boasson and Boasson, 2011).
According to Rubin et al (1999:4-5), in terms of trading practices, hedge funds trade actively in securities and derivative instruments. The trading activity can be characterised by use of mark-to-market discipline, leverage

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