Motley Fool UK – Hedge funds are supposed to make money for their investors regardless of market conditions, right? But all is not well at the moment. In May, hedge fund managers reportedly gave up about half of this year’s market gains.
It just goes to show that stock market can be very unpredictable in the short-term. And regardless of how sophisticated you believe your trading strategies may be you can still be caught out by unexpected events.
When hedge funds first began, Alfred Winslow Jones, who is generally regarded as the brainchild of these funds, bought undervalued shares and sold overvalued ones. He reckoned that this was a good way to make money regardless whether shares rise or fall. So in 1949 he set up the first-ever hedge fund using these principles. And to boost his returns, he also used borrowings to add extra clout to his investments.
Today, hedge funds are ostensibly more complex, though the principles behind the ways they operate remain the same. Their overriding objective is to consistently make money for investors, regardless of market conditions, and they charge a hefty fee for providing this service.
In the main, though, good hedge funds will use carefully constructed strategies to exploit “mis-priced” investments by using options and other derivatives. But the operative word here is “good”, and can one of the estimated 8,000 fund be good all of the time?
