Investment analysis Essay Example | Topics and Well Written Essays - 2000 words

Investment analysis - Essay Example Hedge Fund is an investment partnership of limited wealthy investors or institutions. The minimum investment requirement for entering a hedge fund is much higher than many other investment options. It is also a highly illiquid investment as the fund stays invested at least for a period of one year. Hedge fund is as similar as a mutual fund but differs in quantum of its investments and number of its participants. It is also less regulated than a mutual fund. Hedge funds are managed by a team of experts headed by portfolio managers. Most of the investors will have a say in the management of the fund. This essay will give a brief idea about the strategies adopted by hedge funds for managing funds and the implication of its operations in the overall financial sector. Hedge funds and its mode of operation Hedge funds operate in various methods to handle investment risk. There are several strategies being adopted by Hedge Funds to minimise the investment risk. Some of the most important st rategies are Long/Short Equity, Global Macro, Event Driven, Emerging markets, Equity Market-Neutral, Convertible Arbitrage, Fixed-Income Arbitrage, Short Sellers and Managed Futures. These strategies will be dealt in detail further. Long/short equity: As the name implies this strategy involves taking both long and short positions on stocks. The core concept of this strategy is to go short on overvalued stock and long on undervalued stocks. This strategy is adopted to make profit irrespective of whether the market rise or fall. It is used by hedge fund managers to make profit on both sides. The undervalued stock will increase in value to make profits while at the same time the value of overvalued stock will come down thus making profit on its short positions. â€Å"Thus, the goal of any equity long-short strategy is to minimise exposure to the market in general, and profit from a change in the difference, or spread, between two stocks.† (Barclay Hedge, 2011) Global Macro: Glob al Macro is a more sustainable investment strategy in the sense that it is based on top down analysis or the fundamentals. As the name signifies, this strategy considers the macro economic variables. Company specific investments are also based on factors like management quality, market share, company profits, market competition, financial position, and the like. This strategy also invests in all kinds of investment options like equities, commodities, currencies, etc. Hedge fund managers also hedge such portfolio with the use of necessary derivatives and other instruments. This has been proved to be one of the most successful strategies adopted by Hedge Funds. Event Driven: â€Å"An event-driven investment manager is typically looking to invest in situations where there is some form of corporate activity or catalytic change taking place.† (Leary, 2004) The events include mergers and acquisitions, bankruptcy, asset sales, or any other restructuring pertaining to a particular co mpany. Hedge fund managers predict the movement of the share price based on the nature of the event related to the company. For example a possibility