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Hedge funds

How do hedge funds work?

Hedged funds belong to a large group of open-end mutual funds.

Their advantage is that they are intended for conservative investors who want to maintain the original amount of investment even in the wrong period.

If you don’t believe the tales of the constant growth in the value of stocks and other investment instruments and at the same time want to experience what it’s like to be an investor, hedge funds are the right starting point for a train called investing. However, do not expect a return of ten times, as Viktor Kožený taught us in the mid-1990s.

When investing in hedge funds, you do not risk much. In the event that the investment company that runs the fund goes bankrupt, nothing happens. According to the applicable laws, the fund’s assets are separated from the assets of the investment company. Within the framework of domestic customs, the fund would be taken over by another investment company. A similar phenomenon is common, for example, in pension funds. Your deposit will be the worst damaged by inflation.

First steps with secured investments

The main currency of hedge funds is that they return at least the amount invested to the investor after a predetermined period of time. However, this guarantee is not free. The fund does not even guarantee a return in the form of copying inflation for a predetermined period. On the other hand, if the fund succeeds, the fund can achieve reasonable results and, for example, exceed average annual inflation.

The investment strategy of hedge funds is based on buying quality bonds that have a good investment rating. The investment company that manages the funds is thus based on the assumption that the yield on the bonds is relatively certain. Bond issuers also inform how high the yield will be. This gives fund portfolio managers the key information on which to base their investment strategy and then offer it to unitholders. Needless to say, the hedge fund buys bonds for most of its funds.

The fund invests the remaining money in quality stocks, stock indices or a selected basket of stocks. Other forms of hedge fund investment include options on commodity indices or on the development of exchange rates of selected currencies.

The fact that the subscription period, during which the fund’s unit-holders cannot manipulate their funds, is at least five years, giving the fund a chance to make the most of the capital markets. As we wrote elsewhere on this server, the minimum period for holding shares is five years. Bonds are in a similar situation. However, they do not depend on the length of holding, but on the method of ongoing payment of income, or on their redemption before their full maturity.

How are revenues calculated?

Hedged funds use two basic calculations to calculate the return. The first is that they add up all the returns on investment and these are then converted into total return. The second method of calculation is that the result of the fund is assessed for its entire existence. Both calculation methods can sometimes be combined with each other.

However, an important note is that dividends from shares that are the property of the fund are not included in the income of the hedged fund.

It may happen that the hedged fund does not generate any income during its entire duration. Inflation will devalue your initial investment, which you will get back at face value. Another pitfall lurks for the investor in hidden fees, which may not be apparent from the investment prospectus. Another key indicator is whether the fund invests in investments denominated in foreign currencies and how it remembers currency hedging.

What is good to know before investing in a secured fund

If you decide to invest in a hedge fund, answer a few questions. How long will your investment last and what assets will the fund invest in. Find out the fund’s yield history. Although past returns do not guarantee future ones, at least past returns can be used to determine how the fund has performed in comparison with other similarly established mutual funds. Indirectly, you will find the lowest and highest yield.

An important indicator is the method of calculating the yield. Also find out what the fund’s fee policy is. In particular, focus on entry and exit fees and the management fee. If the fund invests in foreign currencies, then what is the currency security. The last point is the very credibility of the investment company that offers the hedged fund, or how you perceive the person who mediates the fund to you.