Just like a mutual fund, a hedge fund is designed to give investors a better opportunity to maximize a higher profit of return in diverse trading markets. A trading hedge fund is different than a mutual fund because hedge funds are considered to be “long/short equity”. That means that the fund moves in both a small or large amount due to the fluctuations in the trading market. When working with trading hedge funds, hedge fund managers follow a set of rules that classify each fun the company manages. The rules are: what type of style the fund is, the market the fund is trading in, the fund’s exposure rate, the sector the fund is trading in, the type of method the fund is classified in and how diversified the fund is.
The style of the fund can either be global macro or macro. Global macro is defined as a wide range of trading that spans from country to country. Macro is defined as either discretionary or systematic. A discretionary method is based on hedge fund managers picking out the investments for the investors. The systematic method employs the use of a computer driven software mechanism that selects investments for investors based on a market analysis.
The markets where trading hedge funds take place are common commodity markets, systematic markets or an emerging market. Common commodity markets deal with specialized sectors like energy or finance. Systematic markets are involved in trading hedge funds that deal with diverse and cash or note markets. An emerging market deals with trading hedge funds in foreign markets like China or Brazil.
A trading hedge fund can be exposed to many different markets. This is defined as utilizing an equity hedge. The sectors where trading hedge funds take place are in the medical, science and energy markets. The method and diversification of trading hedge fund is defined when the fund is either directional, short bias or event-driven. Directional or short bias markets deal with equity markets that have been on a down slope in specialized trading markets. Event-driven trading hedge funds are classified as situations that affect the hedge funds on the trading market. The situations involved can range from price discrepancies for the funds among the fund managers and what the price is currently being traded for, exhausted debentures, mergers and acquisitions. Exhausted debentures affect the way the hedge fund operates due to the affiliation of company that is possibly going through bankruptcy proceedings.
Once the hedge fund manager defines the type of the trading hedge fund by the rules, the manager will be able to provide potential investors with an indication as to whether a particular fund is the best investment or not.