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    Updated On 10-04-2019
Overview of Hedge Funds

It is important to understand that a “hedge fund” is a name given to a structure, not a strategy, much as a ‘Unit trust’ or ‘Mutual Fund’ is the name of a structure. There are approximately 14 key investment strategies used by hedge fund managers, each offering different degrees of risk and return. Any two hedge funds can be as distinct as any two mutual funds.

As mentioned above, the 14 main hedge fund strategies bear little correlation to one another, and even less to conventional equity investments. They do, however, share certain common characteristics. 

  • Hedge funds are often domiciled in offshore locations, offering the fund managers considerable flexibility in the choice of investments, markets and strategies.
  • Hedge funds strive to deliver positive, absolute returns under all market conditions, rather than performance relative to a benchmark.
  • The returns on most hedge funds have historically had a low correlation to traditional investment returns.
  • Whereas traditional investment products are linked to a market, benchmark or index, and can only profit from rising asset prices, hedge funds can use techniques such as short-selling to boost performance and reduce volatility.
  • Capital preservation is an important focus for most hedge fund managers.
  • A hedge fund manager's remuneration is predominantly down to investment performance, meaning the sector attracts talented managers, and does not suffer poor ones for long.
  • In addition to performance-based pay, hedge fund managers often invest meaningful amounts of their own capital alongside their investors, making their interests truly aligned with those of their investors.
  • Funds that grow too large can be unmanageable, which is why the majority of hedge fund managers place constraints on the size of their funds, believing that there is an optimum level of assets which they can manage efficiently.

The table below mentions some of the aforementioned characteristics of hedge funds, and clearly illustrates the tangible benefits of having hedge funds in your portfolio vs. holding only traditional equity investments. 


Hedge Fund Funds

Traditional Funds

Returns in positive markets

Often catch a good proportion of upside

Similar to the underlying market

Returns in negative markets

Significant reduction in downside

Similar to underlying market

Volatility reduction


Volatility similar to underlying market

Correlation to market direction

Low to medium depending on strategy type


Investment instruments and techniques




Large proportion is performance-related

Generally fixed annual fees, but can also be performance-related

Investment by manager in own fund

Generally involving meaningful sums


If you would like to view an overview of the main hedge fund strategies click here
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