Hedge funds are specifically designed to lessen the investment risk while maintain the return on investment (ROI). Hedge funds fall into two categories: directional funds and absolute-return funds.
Directional Funds Directional funds are hedge funds that do not hedge completely. Directional funds normally maintain a certain percentage of market exposure but try to maximize returns for the amount of risk they take. They try to get returns higher than what is expected. Directional funds are also called “beta funds” because they maintain a certain percentage of exposure to the stock market. They also have a “stock-like return”. Returns from directional funds will not be consistent year-on-year, but, in the long run, they will have higher returns. Absolute-Return Funds Absolute-return funds or non-directional funds are designed to create a steady return on investments, irrespective of how the market is faring. In an absolute-return fund, the manager seeks to eliminate all market risks and create a fund that does not go contrary to the market’s performance. Absolute-return funds are ideal for the conservative investor who does not like to take big risks. Absolute-return funds are similar to bonds as they generate low returns and have very low risks. However, the return on an absolute-return fund is higher than the long-term return on bonds. The return on absolute-return funds is about 8-10% higher than the long-term return on bonds and lower than the long-term return on stocks. Tom Brough Financial Advisor is a financial advisor with several years’ experience in the investment business. Tom holds a Bachelor’s degree in Finance from the DePaul University in Chicago.
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