Hedge Funds Essay

4003 Words Jun 11th, 2011 17 Pages
Hedge Funds

Instructor: Dr. F. Beer

By: Vishal Pahuja | Angel Cardoz |

Contents Introduction by Vishal Pahuja 3 History by Vishal Pahuja 4 Types of Hedge Funds by Vishal Pahuja 4 Key Characteristics of a Hedge Funds by Vishal Pahuja 5 Size and Market Statistics by Angel Cardoz 5 What is the Cost? by Angel Cardoz 6 Cost to manage 6 Cost to Economy 7 Risks and Returns by Vishal Pahuja 7 Hedge Fund Structure by Vishal Pahuja 8 A Success Story by Vishal Pahuja 9 Peer Evaluation 9 Pay for Hedge Fund Managers 9 A Failure Story by Angel Cardoz 10 Long-Term Capital Management 10 The Rise 10 The fall 10 The future of hedge funds by Angel Cardoz 11 Regulation 11 Markets 11 Bibliography by Vishal
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To be able to achieve that goal, hedge funds employ varied strategies. To understand hedge fund, let’s try to understand one of the strategies commonly seen, that is “selling short”. Let’s assume that we have two securities that are related to each other, that is, their price behaves similarly to the market conditions. They move in together over time. Let’s assume that at some point in time, they diverge for whatever reason. This divergence is seen as an opportunity to minimize the risks (or may be greediness!) and make big profits irrespective of how the market is performing. The hedge fund would buy security that is selling below its normal range, as it is expected to increase relative to A, and would sell security A short. “Short selling (also known as shorting or going short) is the practice of selling assets, usually securities, that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to the lender.”
To understand it even better, let’s put some numbers and try to phrase it so that anyone can understand the concept. Let’s consider Beans and Rice, since they are so closely related, we assume that their price always shows similar trends. Difference between their prices is always a dollar and beans are always less than rice. For example if rice is 5$ a
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