jen asked in Business & FinanceInvesting · 1 decade ago

In the lamens terms, for stocks, what is a hedge fund and what does it mean to sell short?

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  • 1 decade ago
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    The term "hedge fund" refers to the classic hedge fund model of "hedging bets" on the market by purchasing options or simultaneously going "short and long" at the same time, so that the hedge fund will make money no matter what direction, up or down, the investment's value goes.

    Easier said than done.

    Today, in the US, hedge funds invest in everything from international bonds to equities to energy to sub-prime mortgages. They're usually restricted to very wealthy investors or large financial institutions such as pension funds, insurance companies, banks, etc. They're essentially unregulated, unlike mutual funds or investment advisors, who have to follow stricter regulations.

    Usually they require a minimum net worth in the multi-millions, and a personal income well into six figures. They generally charge 2% of the initial investment as a management fee and 20% of the gains.

    Their strategies tend to be very high-risk and they use lots of leverage (borrowing) to amplify returns (which also can amplify their losses). They can make or lose huge fortunes in an afternoon.

    "Selling short" means, basically, to sell an investment before you own it. You "borrow" the stock, sell it, and hope to buy it at a later date, when it's gone down in value. The nice person who's lending you the stock is betting that the opposite will occur, and that you'll owe them money instead.

    Say a stock trades at $45 per share. For whatever reason, you're pretty sure it'll go down in value in the next six months. You call a broker, borrow the stock, and sell it, pocketing $45. Then, a few months later, the stock goes to $35 per share. You buy it at that price & return it to the broker, keeping the difference, which is your profit - $10. Nifty, eh? If the stock instead goesto $55 per share, you'd have to buyit at that price, losing $10 per share.

    In practice, few people can sell short in the classic sense, which is to borrow it without owning it, or a "naked short." Most shorts will instead buy a "put option," which confers the right, but not the obligation, to sell the stock at a certain price and time to another, without owning it. In return, the person who takes the other side of this bet is betting it will go up, instead, and will pocket the option premium.

    Options are a bit like insurance. If you total your car, you can force the insurance company to buy it from you, although its value has gone down considerably. In life insurance, your spouse "puts" your life to the insurer, even though you won't earn any more $$.

  • 1 decade ago

    Hedge funds, as opposed to mutual funds, are lightly (almost not) regulated by the SEC. A hedge fund must have fewer than 100 investors and each investor must have net worth of $5,000,000 to be exempt from SEC regulations. This means hedge funds can pursue any and sometimes more risky and profitable trading/investment strategies and are not required to disclose information about investments and finances to investors.

    The trading strategies are quite complex but essentially involve exploiting opportunities to buy low and sell high.

    A short seller attempts to profit from the decline of a stock by selling a stock high and buying it low. The investor borrows a stock, sells it, buys it back and returns it to the owner, and keeps the difference. Losses from short selling can be, theoretically, unlimited because the price of the stock can go up forever. On the other hand, profits from short selling are theoretically limited because the price of the stock can only go down to zero.

  • Anonymous
    1 decade ago

    A hedge fund is largely unregulated and it's investment activities are limited only by the contracts governing the particular fund, it can make greater use of complex investment strategies such as short selling, entering into futures, swaps and other derivative contracts and leverage to avoid taxes. Normally an investment management firm will handle the funds money and will charge a fee based on the increase of the value of the fund's assets.

    Short selling consists of borrowing a security and selling it, expecting that it will decrease in value so that they can buy it back at a lower price and keep the difference to profit from the stock price going down.

    IT IS EXTREMELY RISKY...

    Good luck..

  • 1 decade ago

    A hedge fund is a private investment fund. It invests in almost anything the financial markets have to offer, stocks, bonds, commodities, futures, options, etc. Hedge is a misnomer. They dont actually hedge risk, they take risks in order to obtain absolute returns. Mutual funds relative to some kind of index. Short selling is borrowing securities, then selling them in the market in the hopes they will go down. Then buying them back, keeping the difference as the profit and returning them to the broker you borrowed them from.

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  • 1 decade ago

    a hedge fund is a fund that can take both long and short positions, use arbitrage, nuy and sell undervalued securities, trade options or bonds, invest in almost any opportunity in any market where it foresees impressive gains at reduced risk.

    sell short means profiting off a stocks decline as opposed to going long profitting by stocks going up.

    hope this helps.

    Source(s): Brookstone capital :understanding hedge funds
  • Anonymous
    1 decade ago

    A hedge fund is a mutual fund that can sell short stocks.

  • Anonymous
    1 decade ago

    hedge fund includes variouis fund and different stocks in one portfolio

    short selling means you borrow stock and sell it at high price and promise to buy back the stock when it's lower in order to make profit.

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