What are hedge funds and how are they different from investment banks?

Time and again we have a heard about hedge funds when it came to investment. Let’s try and understand what hedge funds are and how it is different from an investment bank. Well first of all, the main difference lies in the focus or the main thing that they concentrate on. Hedge fund is an avenue of investment where the pools of investments from the investors is formed and invested in many financial products, by putting risk management techniques to good use. On the other hand, investment banking is a financial institution that provides advising services to different business in order to raise capital and provide credit solutions.

Hedge fund technically uses a lot of varied proprietary strategies and trades or also invests in compound products, which also include unlisted and unlisted derivatives. To put it in simple terms, it is basically a pool of money that takes both long and short positions, sells and buys equities, trade bonds, currencies etc. to generate products at reduced risks. It lives up to its name, by which we mean, the fund in concern tries to put or ‘hedge’ the risk against the volatility of the market by giving alternative investment approaches.

Hedge funds are not available to just anyone. They are made for people who are high net worth individuals and institutional investors too, because it contains high risk. It is, in fact, considered as an alternative investment.

The management style of Hedge funds is quite aggressive since it requires to offer more returns to investors. Also, hedge funds are more open ended, by which we mean that the investors get an advantage of withdrawing capital depending on the net value of the funds. Another important point to remember is that hedge funds are not bounded by any kind of limitations, though they were put under certain regulation frameworks in 2007 and 2008 economic crisis.