What are the most popular hedge fund tools?
There are several hedge fund tools available which reflect a wide variety of techniques, from the simplest to the most complex. • Shorting involves selling shares that one does not hold, expecting to buy the shares (cover the short) at a lower price in the near future. To carry out such a transaction, the manager borrows these securities for a certain period of time from a financial institution. • Arbitrage involves taking advantage of market price inefficiencies; for example, buying convertible obligations while selling the underlying equity security. • Leverage refers to borrowing to increase the effective size of the portfolio. • Derivative products–options, future or private contract–can be used on a speculative basis or to hedge a portfolio. • Hedge fund management uses micro or macro economics to either identify opportunities in the basic movements of the economy or the financial markets. It also identifies companies with strong potential or those experiencing difficulties.
