Key Characteristics

Hedge funds can use almost any imaginable type of financial instrument or combinations of instruments to reduce risk, enhance returns and reduce their correlations to the markets. Most hedge funds are extremely flexible in their ability to choose their investments options. They can use put and call options, short investments, futures, swaps and other derivatives.(derivatives are commonly used to hedge a portfolio, rather than speculate). They also may utilize leverage.

The risks, returns, and volatility of each individual hedge fund varies tremendously. A large percentage of hedge funds hedge their downside risk while some do not. A large percentage of hedge funds have the ability to deliver returns that are not correlated to the bond and equity markets.

A common objective of hedge funds is to deliver consistent returns, rather than large up and down swings.

Most hedge funds are managed by management teams that have extremely diligent and disciplined investment strategies.

Banks, high net-worth individuals, family offices, insurance companies, endowments, non-profits, pension funds and many other institutional investors have invested in hedge funds in order to reduce overall portfolio volatility and enhance returns.

A large percentage of hedge fund managers are highly experienced, highly specialized and invest in their area of expertise and competitive advantage.

Hedge funds performance tends to be influenced by the performance incentives paid to the management teams. This fee structure has attracted some of the best investment talent in the world.

Hedge fund managers have their own money, usually a high percentage of their net worth, in the fund. This aligns the management team's interest with their investors.