In article <
7ff3302e-e528-42d0...@googlegroups.com>,
<
bosod...@gmail.com> wrote:
>I've done so much reading on this yet I still don't know WTF they mean
>by the Term "hedge fund", and moreover what's being hedged "against",
>and more generically speaking, what does it mean when you hedge against
>something
Financially speaking, to "hedge" an investment position is to engage
in other transactions that have the effect of limiting potential
losses (and sometimes potential gains) if the market does not perform
in the way the purchaser expects. For example, a fund could buy a
hundred thousand shares of a stock for $25, but at the same time buy a
thousand "put" options on the stock with a strike price of $20. If
the stock price stays above $25, the fund gets all the appreciation,
but loses the premium they paid to buy the options. If the stock
price goes below $20, they can exercise the option and get most of
their money back. If the stock price ends up between $20 and $25,
the fund loses some money but not all of it.
There are other sorts of instruments that qualify as hedges, like
insurance contracts, index futures, repurchase agreements, and so on
-- and these can be used to hedge both "long" (the investor is
planning to own the stock and the price to go up) and "short" (the
investor is planning to sell the stock, possibly borrowing it from
somebody else, in the expectation that the price will go down).
A "hedge fund" was originally a fund that specialized in making these
sorts of transactions to limit investors' risk. However, some hedge
fund operators were able to use loopholes in the rules that apply to
investment funds that are not sold to the general public, in order to
dramatically increase, rather than decrease, the risk using these
sorts of securities transactions. Nowadays, the term "hedge fund" is
used more broadly (some would say improperly) to apply to any
investment fund that invests primarily in securities, commodities,
options, and futures, and is restricted to "accredited investors".
-GAWollman
--
Garrett A. Wollman | "Act to avoid constraining the future; if you can,
wol...@bimajority.org| act to remove constraint from the future. This is
Opinions not shared by| a thing you can do, are able to do, to do together."
my employers. | - Graydon Saunders, _A Succession of Bad Days_ (2015)