Tips for Hedge Fund Trading

Hedge funds have always been a mystery to some people.

Hedge Funds inner workings and strategies have been under close scrutiny from various quarters.

Many individuals, companies, and investors alike have been on the case of hedge funds specifically because of the huge returns they generate for those who invest in them. Well, let’s, consider some tips that are sure to give you an edge in hedge fund trading.

First, all investors have to take into cognizance that all hedge funds have an underlying strategy. In addition, each and every hedge fund has a manager.

Each strategy or set of strategies that underlies a hedge fund is closely monitored by investors in order to ascertain its performance. The performance is linked to the overall capability of the hedge fund manager.

There are various strategies that are employed. Here’s one consideration:

Equity hedge funds

Under this strategy, there’s the long/short strategy and the market neutral strategy.

In the long/short, the managers have prerogative over selling stocks that are overvalued and purchasing stocks that are undervalued.

They will expose the fund to the equity markets but to a positive value. For example, they may invest long in stocks for up to a tune of 60% while invest in shorting of stocks up to 30%.

To deduce the value of the exposure, for the net exposure, you’d have to find the difference between the long investment and the shorting investment, in this case, 60%-40%=20%; whereas for the gross exposure you’d sum up the two values (100%). An important point to note is that under such circumstances, the fund would not be utilizing any leverage.

However, in a case where the long position is increased to say 70%, the gross exposure would amount to 110%. This 110% gross exposure translates into indicates a 10% leverage.

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Market Neutral

In the market neutral strategy, the manager seeks to minimize the net exposure of the fund. He/she might take a long or short position that’s equal to the other thus resulting in a 0% net exposure. The above is just a basic strategy used in trading hedge funds.

How to trade hedge funds ? Tips and tricks

Utilize the Value of Leverage

The secret to the magnanimous returns of hedge funds lies in leverage. Most hedge funds acquire securities on margin. They also fund more acquisitions by means of loans and credit. These act as their leverage.

What’s more is that the returns may be huge enough to cover the interest on these loans and also the commissions owed. Therefore, in the same light, utilize leverage when trading with hedge funds.

 

Use Multiple Brokers

The norm with most investors is that they use a single broker in the purchase and selling of stocks. However, with hedge funds, trades run through multiple brokers, all in an effort to realize even the minute gain. You can utilize this so long as you are keen on factors such as:

  • If the brokers offer a good commission
  • If the brokers have the best execution strategy among the options you have
  • If there are additional auxiliary services provided to benefit the fund.

 

Cash Flow

Hedge funds utilize cash flow. The cash flow of a company is an important indicator of how well or bad a company is doing. The cash flow statement categorizes three key aspects of the company:

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  • Finance
  • Operations
  • Investments

With this knowledge, an investor can ascertain the position of a company. This way, an investor can be able to safeguard against risk while also enhancing their capacity to make an informed investment decision.

 

Reliable Sources of Information

If there is one aspect that makes hedge funds profitable ventures, it’s the reliable access to vital information about companies.

This is normally due to beneficial relationships that they have developed with top level management and key personnel of various companies. Thus, it becomes a smooth process in outworking their mandates.

This is essential since the fund managers have a duty to ensure that they make substantial returns for their investors. As an individual, access to this information is also beneficial if you are to trade with hedge funds effectively.