Though hedge funds have many commonalities as other investment vehicles such as return motive, market orientation, risk, fees etc., it differs in various ways from the traditional funds such as mutual funds or pension funds. In addition to the differences already stated above, below are more characteristics of hedge funds that make them stand apart.
- Investment Structure: The investment structure of hedge funds gives great control and flexibility to the general partner of the hedge fund. Traditional equity management on the other hand gives the individual investor greater control and access to the portfolio information, regulatory protection and liquidity.
- Capacity Constrains: Hedge Funds being largely unregulated give the fund much flexibility to tap on opportunities but they have constraints as to the extent of their marketing efforts, communication to clients etc. Many hedge funds do close once a certain asset size has been achieved for returns to remain attractive to investors.
- Transparency of Portfolio: Hedge funds offer very little transparency compared to traditional assets. Many hedge fund managers are reluctant to do so partially to keep their ‘trade secrets’ within themselves for the fear of competition. However, many hedge funds now do provide monthly performance statements with rations like sharp ratios, beta & alpha etc.
- Risk: Hedge funds are viewed as higher risk than traditional asset management due to leveraging & shorting. However, shorting can be viewed as a risk management tool during periods of market declines between 2000-2002.
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