One of the biggest players in the financial markets are hedge funds, also known as hedge funds. The technology, techniques, and information used by these funds are extremely advanced, thanks to which they make billions of dollars in the market. So you wonder how they work and what can retail traders like us learn? Of course, we can't get into the details of the industry, but hopefully this article will give us a little look at these giants.

What are hedge funds and what makes them different from the rest?

Hedge funds are actively managed private equity funds that use funds collected from investors and invest in a variety of different financial markets. The strategies these funds use are varied. Investing in these funds is relatively difficult because it requires participants to be wealthy individuals, professional investors.

Hedge funds typically require investors to hold invested funds for a specific period of time, usually at least a year. During this period, investors cannot withdraw funds.

Hedge funds also often use leverage to increase the return of their investments but this is a double-edged sword and there have been many funds that have failed because of this tool.


How do hedge funds work?

Hedge funds have characteristics that differ from other funds, such as mutual funds, below are the biggest differences

1. Hedge funds invest in a wide range of financial markets. Unlike mutual funds, which are only allowed to invest in bonds and stocks, hedge funds can invest in all financial markets such as real estate, commodities or trading.

2. Only qualified investors can invest in hedge funds. The regulator tries to protect investors who are inexperienced or who do not understand the risks involved in investing in hedge funds. Therefore, only individuals with an annual net income of over 200,000 USD (for the past 2 years) or individuals with a net asset value of over 1 million USD are allowed to invest in this fund.​

3. “Rule 2-20”. Hedge funds typically charge their investors according to the 2-20 rule. Specifically, there is a management fee of about 2%/year and an additional 20% of the performance fee (extracted from the profit earned). Many people have criticized this type of fee collection, notably Warren Buffett, because he believes that only sharing profits will make fund managers more risky and take too much risk. (This is like some of the fundraisers in Vietnam :D, profit and loss can't be accepted!)

4. Use trading leverage. Leverage is commonly used by hedge funds to increase their trading performance. However, when trades do not go in the predicted direction, high leverage can easily lead to excessive losses.