What are the Risks of Hedge Funds?

Hedge funds, like other types of investments, have risks. Some risks of hedge funds are high but many hedge fund investors are content putting up with the risks of hedge funds in exchange for potentially high returns. Some hedge funds have negative returns temporarily before they bounce back to give hedge funds investors high return. Others consistently show negative returns.

Understanding the risks of hedge funds

It is important to understand hedge funds and the risks associated with hedge funds as well as the differences between the various hedge fund strategies before you invest in hedge funds. Different hedge funds have different investment returns, volatility, and risks. Different hedge fund investment strategies also have varying risks associated with them.

Why do some hedge funds have high return?

Some hedge fund investment strategies which are not correlated to equity markets are able to deliver consistent returns with extremely low risk of loss, while others may be as or more volatile than mutual funds. A successful hedge fund of funds recognizes these differences and blends various strategies and asset classes together to create more stable long-term investment returns than any of the individual funds.

Hedge fund strategies vary enormously - many, but not all, hedge against market downturns - especially important today with volatility and anticipation of corrections in overheated stock markets.

What are the primary aim of most hedge funds

The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive (absolute) returns under all market conditions. Hedge funds that show negative returns consistently have failed this primary objective.

Are all hedge funds risky? Are all hedge funds volatile?

The popular misconception is that all hedge funds are volatile and that all hedge funds carry excessive risks. Many people think that all hedge funds use global macro strategies and place large directional bets on stocks, currencies, bonds, commodities or gold, while using lots of leverage. In reality, less than 5% of hedge funds are global macro funds. Most hedge funds use derivatives only for hedging or don t use derivatives at all, and many use no leverage.