Hedge fund investments first rose to prominence in the UK when George Soros made hundreds of millions of pounds almost overnight by investing in the idea that the British pound would be removed from the European Exchange Rate Mechanism in 1992. Such a huge gamble and consequent reward drew attention from the media, making hedge funds appear to be a near-mystical way of making money on a huge scale with single investments .
The idea that hedge fund managers are capable of the most record-breaking predictions persists; industry personalities such as David Tepper and Louis Bacon are incredibly successful in predicting currency fluctuations, making them very popular with the press.
However, although Soros made a large amount in a short time frame, hedge funds are actually more likely to perform with medium to long term investment,s represented by a portfolio of a wide variety of investments. As hedge funds can essentially trade in any market, these portfolios are very diverse and are able to distribute funds across a range of viable investment options.
This approach combines skill-based investment techniques with different computer-led financial instruments in order to create the perfect risk vs gain scenario. This includes creating diversity in the portfolio in order to reduce risk to the investor. The key thing to remember when choosing whether or not to invest in hedge funds is that even the lowest of risk funds can lose money. While computers are used in order to aid the hedge fund manager, it is essentially the manager’s skill and knowledge which determines the success of the investment.
Finding the right manager for investing money can prove difficult, so research is advised before any commitment. Researching managers thoroughly and looking at their prior achievements is recommended.
The key to a successful hedge fund is diversity. Diversity increases the chances of success but also reduce the damage a poor investment can have on the overall portfolio. The ‘investment index’ is the hedge fund’s version of the FTSE 100 share index. This makes it easier to work across a range of investments and increases transparency in an often opaque market. This approach may not be for everyone however; the investor ultimately must decide which strategy, hedge fund manager and type of investment best reflects their needs.
John Adams 