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Super Investments

Hedge Funds Definition

Hedging

Hedging is a way in which you can produce your overall exposure to the market. This also allows you to profit under any circumstances. So if the market goes up, you can make money, and if the market goes down, you can make money which makes hedge funds very attractive.

Hedging is also very dynamic in that they can take ‘long' and ‘short' positions. A long position is very simple. You can just buy your stock or index. A short position is more complicated since it involves borrowing and repaying which allows you to make money as things go down. So you short is things go down, and you are long if things go up.

The idea of hedging is to provide ‘absolute return' which again makes money regardless of whether the market goes up or down.

A good example of a hedge is what's called a 130/30 fund wherein you have 130 percent of assets long and 30 percent of assets short. So we'll take an example of a $100. Take a 100% of capital invested into long. So you buy a $100 worth of stock which is to say you've raised a hundred dollars of stock. Then you sell 30% of your assets from the hundred dollars which are $30, and you're short selling.

So you have to buy these back later, and hopefully, you'll buy them back at a lower price. Then you make money because they are cheaper. So you sell that $30, give that $30 for selling stock that you don't yet own, and you have to buy it back, hoping the price goes down so it's cheaper to buy it back. And then you take the proceeds, $30 and buy more long shares.

So you have $100 long, another $30 long and a $30 short. So you have $160 total invested when you only started with a $100. You raised a $100. So now you have a $160 in your market and you net exposure is $100 because you've got $30 short and $30 long. And if you're a superb stock picker, you can pick the stocks that are going to go up very well, you have 130% of the assets going well, and you've picked stocks that go down or those that are going to fall fastest. This is a highly rough strategy that is going to work well.

Leverage

Another key idea with hedge funds is leverage. This is borrowing money to invest. You can borrow money from banks and brokers. You can invest that money, and if you are excellent, you can pay your debts and profit a lot between the different interest rate and the gauge you are making. But of course, they do want your money back, so it is very risky. These investment banks and brokers are not writing things off.

Investments made
The areas in which hedge funds invest in include:
• Stocks and bonds
• Commodities (gold, silver, metals, soya, beans, etc.)
• Currency markets (e.g. devaluation)

More information about hedging can be found on our knowledge base - www.australiansuperfinder.com.au

All information on this website is of a general nature only. We have not taken into account your financial situation, needs or objectives. You need to make up your own mind and ascertain yourself if it is right for you. We recommend you read the product disclosure statement(s) and the financial services guide before making any financial decision.

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