What is the primary investment strategy employed by hedge funds?
ALong-term buy-and-hold strategies
BSpeculative trading of equities
CPortfolio diversification for risk management
DHedging and leveraging techniques for higher returns
Answer:
D. Hedging and leveraging techniques for higher returns
Read Explanation:
Hedge funds
- Hedge funds are investment funds that pool money from investors and use various strategies to generate high returns.
- Unlike traditional investment funds, hedge funds can employ a wide range of techniques such as borrowing money, short-selling assets, and making speculative bets on market movements to potentially profit from both upward and downward market trends.
- While these strategies can lead to substantial gains, they also carry higher risks compared to conventional investment options.
- Additionally, hedge funds often operate with fewer regulations and higher costs, making them a more complex and exclusive investment option.
Hedging and leveraging techniques for higher returns
- Hedging involves taking an offsetting position that helps to reduce the risk of adverse price movements in an asset.
- For example, if a hedge fund holds a portfolio of stocks, it might use options contracts to hedge against potential losses.
- While this may limit potential gains, it can provide protection against market downturns.
- Leveraging, on the other hand, involves using borrowed capital to increase the potential return on an investment.
- Hedge funds might leverage their positions by borrowing funds to invest in securities or other assets.
- This amplifies gains if the investment performs well, but it also magnifies losses if the investment performs poorly.