Madison Street Capital Consultants Outline The Creative Side Of Investing
In the investment world, hedging is a way to reduce risk creatively. Therefore, companies, such as Madison Street Capital, emphasize the use of hedge funds to minimize risk without cutting into a client’s investment income. In turn, financial analysts look at hedging as a creative way to generate a regular return, regardless of the market.
Although risk is the normal element of investing – the higher the risk, the high the return, hedge funds can offset this challenge. Therefore, a hedge fund manager routinely seeks ways to get rid of some of the risks while taking on other risks with an anticipated decent return.
The Risk Still Remains
For instance, a fund manager may take the risk out of investing in stock by selling index futures. He or she may also increase their return from a normally low-risk investment by borrowing money. When this approach is used, it is called leveraging. However, just because an investment banker may use hedging, it does not mean the risk is not there. The risk still remains, regardless of the hedge fund technique.
Therefore, as indicated, the major challenge for a hedge fund manager is to pare down some of the risk while getting a good return on investments. This kind of task is not simple. That is why investors rely on investment companies to keep them on top of their M&A (mergers and acquisitions) investments, including the use of hedging techniques.
To further define a hedge fund, you might also call it an alternative investment that offers absolute returns. The returns are seen inside such financial markets as bonds, stocks, commodities, derivatives, currencies, etc. Non-traditional portfolio management strategies are used, including the aforementioned leveraging, short selling, arbitrage, swaps, etc.
According to investment specialists at Madison Street Capital, the hedge fund was first devised in 1949 in the US. However, the concept really was launched in the late 1980s. Hedge funds now form an essential portion of private and institutional portfolios. As a result, they are normally utilized in the context of a portfolio versus a stand-alone investment.
The Objective of Hedging
In a traditional portfolio of stocks, hedge funds are often considered a medium or long-term investment. Because the performance of a hedge fund tends to be lowly correlated with traditional investments, the fund provides the investor with a good source of diversification. By combining various innovative approaches in diversified instruments, a hedge fund portfolio tries to achieve a return/risk profile that is balanced and diversified.