What are hedge funds?and how they are related to forex market?
A hedge fund is a investment vehicle similar to a mutual fund. However unlike a mutual fund they are not required to register with the SEC, which means they have no restrictions on what they can invest in. A hedge fund can invest in stocks, bonds, derivatives, futures, etc.. A hedge fund can use leverage (buy stocks, bonds with money it borrowed and has to pay back). It can also use an investment strategy called shorting which means you sell something you don’t own hoping to buy it back later at a lower price.
Because hedge funds are not required to register with the SEC they cannot be marketed to the public and they can only accept investments from investors who are considered accredited (have a net worth of over $1.5M) or qualified (have at least $5M in liquid investments). This is done in an effort to ensure that the people who invest in hedge funds understand the complexity of the investment and are sophisticated and educated on the risks that they may have.
This description is incredibly simplified but its a good general way for a layman to understand what a hedge fund is.
Many people like to say they are very risky but that’s patently untrue, hedge funds are consistently exhibited far less risk and better returns than the stock market. I have a number of statistics that can back up that statement and have yet to see any statistics suggesting otherwise. The average hedge fund investor lost a whole lot less money than the average mutual fund investor in 2001 and in 2008, and have a lot less volatility of their returns.
As far as how they are related to the forex market, some hedge fund strategies, called Global Macro use quantitative models and trend following programs to select investment strategies based on a number of different macroeconomic factors which includes actively investing in the currency markets as part of a broader strategy.
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