If you are looking to increase the total return borne by your portfolio, making hedge funds a part of your investment strategy is a pretty good idea.

To know more about these amazing return-generating financial structures, read on –

An introduction to hedge funds

Hedge funds are private funds that use complex investment strategies to mitigate risk and exponentially increase the ROI (Return On Investment).

They are generally run by highly-skilled and experienced managers who have an extraordinary track record in the field of investment. Hedge funds make use of investment strategies and trading methods that are usually not available to traditional investment funds, such as mutual funds. They even have a freer hand in their methods of investment and can use a wider range of financial instruments for the same.

Derivatives are investment risk management tools and they derive their value from the underlying asset. For example, take the scenario of a teacher and a student. The value inculcated in the student is directly dependent on the maximum potential value of the teacher. The more efficient a teacher is, the more knowledgeable their student will be. Similarly, hedge funds use these derivatives to hedge their positions, mitigate risks or cite a view on the future direction of the trend of a particular investment like stocks, bonds, and other such financial instruments. These additional supportive tools are only available to hedge funds and not to traditional funds.

Like the two sides of a coin, if the profit is multiplied with the help of these derivatives, so is the loss in the case of a wrong investment call.

What are the benefits of making hedge funds a part of your investment portfolio?

Your money is in skillful hands-

Hedge funds give you access to some of the best investors in the market. As the success of the hedge funds is directly dependent on the investment capabilities of the managers that lead them, the best-performing hedge funds are often led by high-performing individuals who have a proven track record of generating returns that beat the market.

Get a bigger hand in the world of investing -

Since the hedge funds are able to access an increased number of investment tools, they are able to employ different investment strategies that their financial counterparts cannot. Leveraging is one such example. It is basically the ability to buy a larger lot value of any financial instrument by only paying a ratio of the total investment needed. This allows hedge funds to make an unbelievable amount of money when used right and the best hedge funds are leverage experts!

A vast ocean of opportunities -

Hedge funds can invest in the various financial markets present across the globe; this allows them to invest in markets and financial instruments that have higher profit potential. However, the risk also increases proportionally in the hopes of higher returns.

Get to diversify your portfolio-

Hedge funds are less attracted to financial assets that are directly affected by human sentiments and as a result, they tend to keep their distance from the movements of the public markets. As an investor, this works highly in your favor as you get to add a varied type of asset classes to your investment portfolio. However, this does not mean that hedge funds cannot deal in the public markets. Although not many, a few hedge funds do invest in the public capital markets but only when there is a relatively higher profit potential and that too at minimum risk.

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