Hedge fund is an investment fund (mutual fund) with a complete discretion at choosing the investment strategy, exempted from government regulation and, as a rule, targeting returns irrespective of the market trends.

Hedge fund (as its well-known fellowmen – mutual fund) is based on the principles of collective investments. They imply cash assets collection from many investors in one place and their subsequent distribution into various assets: stocks, bonds, real estate, gold etc. If each investor had acted alone, he would have needed not only skills of a professional asset manager but also much larger funds comparing to his investments into the mutual fund to achieve similar results.

Unlike traditional investment fund, hedge fund is being considered as an alternative type of investment. The strategy of an investment fund is aimed at getting returns from raising prices of the securities, as well as dividends from stocks and cupons from bonds, while hedge fund also targets returns from the falling market or the spread between the speed of raising and falling prices of different securities.

Hedge funds are a relatively young type of investments. Though the first such fund has been founded in 1949, hedge funds became popular only in 1980s. Unlike traditional funds, investment objects of hedge funds may not only be traditional securities (stocks, bonds etc.), but also derivatives (options, futures). It allows the hedge-fund to distribute (diversify) risks more efficiently and offers wider opportunities for income generation.

The term “hedging” means insurance against possible losses and hedge funds comply with this definition well: they are able to generate returns not only when all indices are raising, but also when they are experiencing sharp fall.

How is that possible? The very first hedge funds have implemented a strategy of a simultaneous purchase (long positions) and sales (short positions) of securities of different companies and sectors. It allowed to get return from multidirectional movements in securities during periods when there wasn’t any obvious trend in the market. When securities had a directional trend, the fund made return from the spread of growth rate or fall rate between the securities.

Today we can distinguish between three major hedge fund strategies: relative value, event driven and directional strategies.

Relative value strategies include both long and short positions. Fund portfolio is being formed from the purchase of relatively underpriced securities (long positions) and sale of overpriced securities (short positions). The fund makes profit when the market reevaluates stocks in the right direction.

Event driven strategies are based on expectations of certain corporate events, including those providing arbitrage opportunity. And finally, hedge funds with directional strategy aim at forereaching tendencies and events in global markets.

A successful implementation of sophisticated strategies is impossible without professional fund managers. An important part of the hedge fund management is a well-driven risk management, which includes a multilevel control system and sophisticated mathematical models.