How Hedge Funds Work
Hedge fund strategies are designed to pool the financial assets of a group of investors and invest the combined wealth in various financial vehicles. This has the benefit of increasing the potential gains while limiting the risk each individual investor is exposed to. In addition, hedge funds are allowed to trade in asset classes which many other funds such as mutual funds or exchange-traded funds (ETFs) aren't allowed to purchase. This includes assets such as unregistered securities or private equity. Of all the funds available to private investors, hedge funds offer the greatest variety of possible investments.
That being said, firms typically limit themselves to trading in specific assets. For example, they may opt to focus on buying and selling commodities or financial futures. This allows them to specialize in a particular area of investment, with the added benefit of giving you a clearer understanding of the strategy they employ.
When and How You Benefit From Investing in a Hedge Fund
Investing in a hedge fund means providing the hedge fund manager and staff with money they can use to make investments. To do this, you first need to put in a minimum investment as defined by the fund's prospectus. This is the minimum amount of money you need to become an investor in the fund. Once you're in, the prospectus can also define specific times at which you are allowed to withdraw your money to reap the benefits of your investment. For example, when you invest in CARL's quantitative investment strategies, you can withdraw money on a monthly basis, providing maximum flexibility and asset liquidity. This isn't always the case, though, as many other hedge funds impose long lock-up periods which prevent you from withdrawing your money quickly.
In many ways, investing in hedge funds is a relatively hands-off approach to investment planning, as the fund's employees do all the actual decision-making and active trading. You just need to keep an eye on the fund and decide when to withdraw or increase your investment.
How the Hedge Fund Firm Makes Its Money
Since they're the ones responsible for finding, evaluating, and selling or buying assets, hedge fund companies offer their services at a price. Typically, this means you'll have to pay two types of fees:
- A management fee – a specific percentage of all assets under management (AUM)
- A performance fee – a specific percentage of profits made in a trade if the profits exceed the hurdle rate as defined in the fund's prospectus
This means in addition to a regular annual fee for management services; you'll also pay a premium if one of the fund's trades has created unusually high profits. This system is designed to pay for regular expenses associated with managing your money while offering fund managers an incentive to outperform. In many cases, this arrangement consists of a management fee of 2% and a performance fee of 20% – this is so common that it has become known as the "two and twenty" model.
Do Hedge Funds Day Trade?
Day trading is one of the many strategies that hedge funds can use to make gains. Whether a specific fund takes advantage of day trading strategies is another matter, though. Hedge fund investment strategies that focus on long-term buy-and-hold strategies are unlikely involved in day trading since the concept behind day trading means you're aiming to have all of your positions closed by the end of the day. This isn't necessarily a useful approach for the trading strategies of long-term funds.
Many hedge funds use day trading to diversify their portfolio or supplement their gains – though the day trading model may not fit in with the strategies of many funds.
Other trading strategies employed by hedge funds include:
- long-short, long-only and short-only
- global macro
- arbitrage and fixed-income arbitrage
- and many more
How Do Hedge Funds Trade Stocks?
Hedge funds trade stocks like any other investor, though their financial power and know-how allow them to optimize such trades in every respect. For example, they may compare different brokers' services for the same transaction. In contrast, most non-professional, private investors likely make all their stock investments via the same broker.
What Trading Software Do Hedge Funds Use?
The hedge fund industry uses costly and high specialized proprietary software packets. CARL's quants are no exception. In fact, they use complex algorithmic software suites to automatically determine the most favorable course of investment – in addition to the software used by the fund's traders to place trades on the stock market, for example.
You probably won't be surprised to hear that the software used by hedge funds is typically not available to other companies, much less individual investors. Accredited investors do have the chance to use the CARL app, however. With this app, finding, evaluating, and investing in quants is as easy as it's ever been. Its tools allow you to invest directly into the funds you choose. At the same time, the app provides you with valuable information, such as the historical development of your chosen fund or its annualized volatility.
Since you're not evaluating and investing in individual assets yourself, you won't need complicated proprietary hedge fund software suites – but you'll definitely benefit from the CARL mobile app. Invest whenever you want, wherever you are – with CARL!
Grow Your Wealth With CARL’s Quants
CARL gives you unprecedented access to quants of various types and with various investment focuses, from long/short equity to managed futures. With a minimum investment as low as $20,000, this gives you the chance to benefit from sophisticated quantitative investment strategies otherwise only available to a rich elite. CARL breaks down the hurdles that have previously prevented accredited investors from getting into quants, so that you can benefit from highly liquid investment opportunities with 15%+ targeted returns. Set up your CARL account to get access to some of the most promising quants available today.