Hedge fund is a widely popular investment vehicle. It pools money from several organizations and individuals, and subsequently invests in a wide variety of liquid and illiquid securities with the aim of enjoying high returns. In the opinion of Scott Tominaga, hedge funds first came into existence sometime in the 1940s. It was initially established for wealthy investors looking for ways to include assets in their portfolios that did not closely correlate with the performance of traditional investments.

Scott Tominaga underlines the types and advantages of hedge funds

Hedge funds are managed differently from traditional stocks, bonds or mutual funds, so they fall under the category of “alternative investments.” Until recently, hedge fund access was limited to pension plans, large institutions that manage money for individuals or organizations, and clients with millions of dollars to invest. Today, regulatory changes allow hedge fund availability to more individual investors.

Four common types of hedge funds are:

• Global macro hedge funds:  These are actively managed funds which attempt to profit from broad market swings caused by economic or political events. 
• Equity hedge funds:  Such funds can be global or specific to one country. It involves investing in lucrative stocks while hedging against downturns in equity markets by shorting overvalued stocks or stock indices.
• Relative value hedge funds: Such funds typically seek to exploit ant kind of differences in the prices of related securities and take advantage of price or spread inefficiencies.
• Activist hedge funds: Such funds aim to invest in specific businesses and take actions that can help boost their stock price. They, for instance, may demand that the companies cut costs, restructure the company assets or even change the board of directors.

Hedge funds aim to achieve consistent, positive returns, no matter how traditional assets or market indices perform. Their strategies vary widely, and offer diverse risk and return profiles. Hedge fund strategies can allow for potential gains across all market phases, regardless of whether they are rising, falling, or remaining stable.

When assessing the risk of investing in a hedge fund, a number of important factors should be analysed. These factors include volatility, measuring the variation or spread of returns around the average, as well as the symmetry or asymmetry in the distribution of returns relative to expected values.  There are many advantages associated with hedge funds, such as: 

• Hedge funds may take short positions in addition to holding long positions. The goal of such strategies is to lower the risk of long-only strategies. Therefore, they lower their exposure to market risk and tend to use leverage to improve portfolio returns. Short positions are generally taken in lower-quality assets, while long positions are taken in undervalued stocks.
• Hedge funds are well-suited for investors who want to diversify portfolio risk through alternatives outside the traditional market. The use of leveraged derivatives enables hedge funds to create more complex strategies.
• Hedge funds may use quantitative strategies, under which automated trading is employed on the basis of systematic and/or algorithmic data analysis.

As per Scott Tominaga, owing to their hedging strategies, Hedge Funds may have lower volatility. Hedge fund investors enjoy the benefit of accessing diverse markets and instruments that traditional investors cannot.