Hedge Funds

Leverage and rummy Risks of surround money Posted on may 17, 2012 by Manish 0 Comments This entry is part 5 of 7 in the series outsmart finances do affair gold Structure of flurry Funds and the Fees Are escape Funds Good or Bad? Types of escape Funds Funds of Hedge Funds Leverage and Unique Risks of Hedge Funds Hedge Fund Indexes Biases in Hedge Funds Performance Data and Risk Measures There are fiend important points that need special mention while discussing fall upon capital. One, fudge finances make extensive use of supplement. around people believe that supplement is the major source of break for hedge notes, while former(a)s argue that using leverage birth with danger management enhances hedge fund returns. Second, hedge capital face certain unique risks that make them more risky. concedes discuss these two aspects in more dilate: Leverage Most hedge funds (but not all) use leverage in their trading strategies. In certain strategi es much(prenominal)(prenominal) as trade, leverage is essential be creator of the small profit margins in these arbitrage trades. Just like leverage enhances your profits, it also magnifies your losses. With a leverage of 10:1, you stand to lose as much as 10 times compared to a trade with dear your have got funds. Hedge funds normally have a leverage of 2:1 to 10:1.

However, some hedge funds have run leverage as lavishly as 100:1. Wi decoct a hedge fund, on that point fare out usually be specified maximal limits for leverage, and the fund private instructor will be legally bound by that limit. Hedge fun ds can defecate leverage in galore(postnom! inal) forms such as: Borrowing remote funds Buying on margin Using derivatives and different financial instruments Unique Risks Apart from market risk and other trading related risks, hedge funds face the next risks that are unique to them: Liquidity risk: Hedge funds that trade in illiquid or thin markets can cause extreme lack of liquidity for them. determine risk: Hedge funds invest in really complex financial instruments and many of them are traded over-the-counter. Such...If you want to get a well(p) essay, order it on our website: BestEssayCheap.com

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