How does a hedge fund work?

CityPress - - Business -

Hedge funds are very sim­i­lar to unit trusts, but ap­ply a num­ber of dif­fer­ent strate­gies to mit­i­gate the ef­fect of mar­ket volatil­ity. The most com­mon hedge fund strat­egy in South Africa is re­ferred to as “equity long/short”.

If the fund man­ager chooses to go “long”, this means that he or she will buy a share or a bond and then hold it with the hope that it will in­crease in value.

If the man­ager chooses to go “short”, it means that he or she doesn’t ac­tu­ally buy the share or bond, but “bor­rows” it from an­other in­vestor and sells it.

The ex­pec­ta­tion in this sce­nario is that the price of the share or bond will drop. When that hap­pens, the man­ager can then buy the share or bond at the cheaper price and re­turn it to the orig­i­nal in­vestor he or she “bor­rowed” it from, which means the man­ager makes a profit on the dif­fer­ence.

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