What are the hedge funds?
A free investment fund or Hedge Fund, likewise called an alternative investment instrument, and high-risk fund, is a financial instrument for investment managed by stock companies, fund managing entities or byinvestment banks.
In Spanish legislation it is regulated by Law 35/2003 of Collective Investment Institutions and developed by Royal Decree 1309/2005, of November 4, of the Regulations of Collective Investment Institutions.
The industry of Hedge Funds has shown an important growth in recent years, especially since 2001, in spite of the fact that one of its main characteristics is the scarce or null regulation thereof. Nevertheless, there is no doubt regarding the growing trend toward a greater degree of control.
It is a matter of a product that is not meant for the retail market, due to its high-risk and complexity level, given that it is essential that the client know and understand the product, the strategy utilised, as well as the agent, prior to making an investment decision.
Hedge funds: a risk product
This industry is very heterogeneous, therefore it would be very complicated to establish a rating system. Nevertheless, it is worth mentioning here certain characteristics that confer Hedge Funds such a high-risk level compared with traditional funds:
- Privately organised collective investment and managed by professional companies unavailable for the public in general, given that it requires high investment minimum amounts.
- Without restriction in the investment policy, flexibility and freedom to operate due to scarce regulation.
- With restricted liquidity.
- Possibility of lending shares and maintaining short positions.
- Freedom of leverage and the use of derived instruments.
- Organisations focused on key people.
- They utilise financial investment techniques that are not allowed for traditional funds: uncovered sale, use of financial by-products or arrears insurance, interest rate hedge or swap, forward contract , financial options, and purchase of securities by way of aggressive leverage.