Hedge Fund Volatility

Hedge fund volatility is an especially important discussion now with the market and economy feeling distressed. The first thing to understand is what exactly a hedge fund is.


A hedge fund is a fund that can invest in short term or long term purchases, but the primary strategy is to remain in the stocks just as long as possible to maximize income and minimize risk to its shareholders, and to get out before the fund has lost money on that particular purchase. They are intended to give returns to its shareholders no matter what is happening in the market by preserving its original investment and getting in and out of stocks or bonds before they experience a downturn.


Hedge funds are open only to a limited number of investors, but are allowed to invest in a varied amount of types of things, like stocks and bonds, debts and commodities, and things like real estate which aren’t linked to the regular stock market. A hedge fund pays a commission to its manager for running the fund.


The difference between a hedge fund and a normal investors fund is that hedge funds invest in such a wide variety of types of investments, and most funds are only an option for very well to do investors. Also, the fund manager plays a much different role than a mutual fund investor, and researches all kinds of investment opportunities.


Volatility is an interesting concept when discussing hedge funds because usually hedge funds do not experience as much volatility as the normal market. But every fund is experiencing volatility at this time, and hedge funds, as well as regular investment funds are suffering from market volatility.


General market volatility is actually important to hedge funds, as the fund managers thrive on the wild market, so that they can invest in things at a low point and sell them before they hit the bottom. Strong fund managers can take advantage of market volatility and use it to their advantage to increase earnings.


It is important to be willing to invest in a fund for a reasonable amount of time, because funds are meant to go up and down in value, and it is best to find a fund that takes advantage of hedge fund volatility if you plan on investing in hedge funds.


Paradigm Capital Management is an expert hedge fund managing firm. The firm also launches and manages equity mutual funds and hedge funds for its clients. Paradigm Capital Management, Inc. was founded in 1972 and is based in Albany, New York with an additional office in New York City. Call at (518) 431-3500.


Read also: Hedge Fund Methods Open Up to the Small Investor – Through Mutual Funds


Understanding Hedge Fund Management Styles

While performing due diligence on a potential hedge fund, you should take the time to get to know the management style favored by those who will be managing your investment. Most hedge fund managers have a specialty, and this expertise is often directly related to the types of decisions that will be made and which markets will be explored for profit potential. Because these types of investments need active and insightful decision-making in order to obtain the best result, the style of management will have a substantial impact on the level of returns you can expect from two similar hedge funds. Understanding the performance style will also allow you to track the general returns for similar styles in the past, providing a more thorough evaluation of the hedge fund overall.


Common Styles for Hedge Fund Management


No one investment discipline is superior to the others, and most are tailored to maximize returns on a specific type of investment. A successful hedge fund may employ any or all of these styles to some extent, depending upon the types of opportunities that comprise the fund. Keep in mind that when performing due diligence on the fund, you will need to keep in mind not on the style, but the intended market when making your evaluations.


  • Fixed-Income Arbitrage – uses the price anomalies between related securities to obtain profit. This style can be used domestically or abroad to generate positive returns. These returns tend to be steady, and fixed-income arbitrage is generally focused on minimizing volatility.
  • Managed Futures – utilizes commodity and financial futures markets, as well as currency markets globally. This style of management relies on accurate and timely information regarding pricing and other technical knowledge to maximize returns.
  • Global Macro – this type of style focuses on long and short positions in both capital and derivative markets throughout the world. Tied closely to global economic events, they can be invested in emerging markets and economies as well as developed countries.
  • Event-Driven – just as the name suggests, this style focuses on pricing movements that are linked to events that happen in businesses, either locally or globally. Mergers and acquisitions are two of the most prevalent events that this type of style may follow.

There are other hedge fund management styles as well, each with its own advantages and drawbacks. How these styles are implemented by the fund manager will vary based upon the unique circumstances and investments surrounding each individual hedge fund. By fine-tuning these styles to closely follow the data and expected trends, exceptional returns may be possible.


Evaluating the type of hedge fund management style that your hedge fund manager prefers cannot be done in isolation. You must consider not only the style, but the current market conditions, the companies and other institutions that may be part of the investment, and the potential of those companies, stocks, or other ventures. It is only after gaining an educated overview of the entire situation that a management style can be properly evaluated for potential effectiveness.


Whether you’re a seasoned financial investor, or a novice just starting out in the world of international investment, the professionals of Paradigm Capital Management have the experience, skill, and dedication to help you attain your financial goals.


Paradigm Capital Management is an employee owned hedge fund manager. The firm also launches and manages equity mutual funds and hedge funds for its clients. Paradigm Capital Management, Inc. was founded in 1972 and is based in Albany, New York with an additional office in New York City. Call at (518) 431-3500.


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