Definition of ‘hedge fund’
There are many definitions of hedge fund (or hedge fund, in its literal translation into Spanish), and there is none universally accepted. It is complex to fully describe what a hedge fund is, since we are referring to a series of very heterogeneous investment vehicles with very diverse characteristics.
The most notable of the definitions that can be made of this type of investment is, first of all, that a hedge fund is a vehicle to invest, a collective investment institution, although it can take different legal forms (company, investment fund or others).
Also a very important feature of hedge funds is the freedom to operate. Hedge funds do not usually have more limitations than those of their own regulations. This allows them, among many other things, to make massive use of derivative instruments and to take short positions through securities lending (consists of the sale of an asset not owned by the investor, but borrowed through an intermediary and later bought for repay the loan. The benefit is obtained if the initial sale is made at a price higher than the purchase price. With a short position the investor obtains a greater benefit if the price of the asset decreases).
Short positions can also be taken through derivatives; for example, selling futures of a certain security. The problem that hedge funds encounter is that not all listed assets have futures or other types of derivatives with which to take short positions, which is why they often need to loan securities.
The main characteristics of hedge funds are summarized in the following table.
Characteristics of hedge funds
Rafael Hurtado Coll, Professor of Finance at EAE Business School
See also FREE INVESTMENT FUNDS and FUNDS OF FREE INVESTMENT FUNDS.
Facebook Comments
Disqus