Note: This article does not necessarily reflect the views of The Teen Trillionaire and is written purely based on the author's opinions.
What Hedge Funds Are:
You might have heard the term “hedge funds” before. And then heard a bunch of jargon about those funds’ behaviors, yet have no idea what’s happening. Hedge funds are a type of investment instrument that uses derivatives, leverage, and short positions in stock. Short position in stock means that if the stock’s value falls, the investor will profit.
There are many common strategies. We will be exploring three of them. The first one is called Long/Short equity. Long story short, this strategy is used by buying stocks expected to rise and selling stocks that are expected to fall. Another strategy is the event-driven strategy. In this strategy, investors can benefit by profiting off stocks mispriced because of a corporate event. Corporate events can include acquisitions, mergers, and bankruptcy. And the third strategy is called quantitative hedge funds. They use quantitative analysis and technology based on mathematical models and/or machine learning techniques to compute and make trading decisions. The inner workings are more obscure to the general audience than a different strategy.
Is it Worth it:
Many hedge funds require a larger initial investment than other investments like mutual funds or stocks because there are less strict regulations. They might also only be available to experienced and accredited investors because of the same reason. These factors can also result in more risk as more money is locked in and large losses can be a greater reality.
I don’t think investing in hedge funds is worth it. While they can produce greater returns, they can also produce greater losses. Because I have a lower risk tolerance, I would prefer investing in mutual funds and exchange-traded funds (ETFs) for their more diverse portfolio. But, in the end, make your own decision. It will depend on your risk tolerance, or how much you are willing to risk, or on other factors like how much money you can invest. Hedge funds are also considered active, so it will depend if you like investing actively or passively. Good luck, and go on to be a Teen Trillionaire!
Written by Allie Chang