The cover is a method of management of portfolios applied by certain investment funds known like â€śhedge fundsâ€? or â€śfree investment fundsâ€?. The minimum investment is generally high. On the other hand, they are not regulated like conventional products, therefore the free investment funds could not be distributed to the public generally and are reserved for the category of the institutional investors or great fortunes.
Its objective is to descorrelacionar the yield of the portfolio of the general evolution of the stock market by means of the intervention in the stock markets, through bonds, currencies, raw materials, real estate and societies nonquoted, the art work marketâ€¦ The objective is to improve the yield in comparison with the market to have one better relation yield/volatileness. These â€śhedge fundsâ€? are considered of risk and have served in many speculative attacks on currencies, with a negative economic impact for the attacked country. Some examples are the economic crisis in Mexico (1992-1994), the Asian crisis of 1997-1998, Russia, Brazil, etcâ€¦
They appeared in the decade of 1950 with the work of Alfred Winslow Jones, an ex- journalist of the Fortune magazine.
They were shortages by the public during the devaluation of the pound sterling after the intervention of George Soros. In November of 2007, almost 10,000 bottoms of cover existed that operate anywhere in the world and manage approximately 1,760 million dollars.
Types of assets used in the portfolios of alternatives
- Defensive actions during the cyclical bearish market, or action of high coefficient beta in bullish market.
- Derivatives: in agreement with the tendency of the market, the administrator can buy or sell contracts that benefit from the slopes. The manager also has the capacity to borrow more titles of those than he must with the purpose of to increase the leverage.
- The investment in very specific areas, such as currencies, raw materials, etc.
Participation of the managers
The managers of hedge funds invest an important part of their personal goods in the bottoms that manage and their wages depend mainly on the action of the Bottom and are therefore, associate with the investors. Although these bottoms usually are closed and limited in size, the potential benefits of these managers of the bottom it can get to be enormous because.
Tools of Hedge Funds. Strategies
- The sale in short (short sale) is to sell the values without having them with the hope to buy again more cheap later.
- The arbitration consists of taking advantage of the differences unwarranted prices, for example, by means of the convertible bond purchase, supposedly undervalued, whereas it is sold in short the underlying action.
- The leverage search (leverage), to borrow to increase the size effective of the portfolio.
The use of derivatives: options, contracts of futures or free sale frequently or with speculative aims, or rather to cover the portfolio.
- Quantitative of commerce: it is to take positions based on predictions from a quantitative model, in order to detect signals of purchase or sale.
- Global Macro: trying to take advantage of the evolution the world-wide economy, in particular changes in the frequency due to the economic policies of the government. It uses instruments that reflect world-wide the economic situation: currencies, indices, the efficiency curves, the raw materials.
- Special situations (Event Driven): the administrator looks for opportunities generated by events that happen in the life of the companies: branchs, fusions, or difficulties
Risks of the cover bottoms
- The cover bottoms to a great extent are not regulated and to evaluate its risk is difficult for an individual investor.
- Low liquidity. The Hedge Funds usually is closed, and therefore less liquids than other investments. The cover bottoms usually offer a little liquidity to their subscribers, doing to hope of 1 to 3 months before obtaining the reimbursement.
- Transparency. They can be very opaque, is very important investing them to be advised by a specialist in the market that has direct bonding with the managers of the bottoms.