WHAT IS A HEDGE FUND?
Just like any unit trust, a hedge fund unit trust is a pooled investment vehicle that allows multiple parties to invest in a pre-defined investment opportunity.
What set hedge fund unit trusts apart from other unit trusts are the additional tools available to the hedge fund – shorting and leverage. The primary purpose of a hedge fund is to maximize investor returns for a given level of risk.
The title ‘hedge fund’ originates from the fund’s ability to go short, providing an additional tool to generate profit or manage risk. In comparison, a traditional ‘long-only’ unit trust can only buy instruments in anticipation of increases in value. Hedge funds can additionally ‘short’ instruments – either to try to profit from a decrease in instrument value or to ‘hedge’ against an adverse market movement.
Shorting is when the fund borrows a share that it doesn’t own from another shareholder. The fund can therefore make a profit from a decreasing share price, should the fund later buy the share back at a lower price. Shorting can also be used to protect the fund against downward market movements. This decreases the risk to the investor and provides downside protection.
Hedge funds can use borrowing to increase their returns. This allows fund managers to target trades with small mispricing and inefficiencies so as to scale smaller returns so that they ultimately translate into larger returns for investors. This is known as leveraging/gearing.
It is a combination of this ability to short and/or to leverage a share that makes hedge funds unique from other investment products such as a traditional unit trust. Essentially, the added flexibility provides protection and additional investment opportunities for the investor.
WHO CAN INVEST IN A HEDGE FUND?
Prior to 2015, hedge funds were only accessible to institutional and wealthy individual investors. This is not, however, the case today.
Anyone – be it an individual, pension fund, trust or family office – can invest in one of SouthernCross Capital’s hedge fund products from R1 000, administrated via debit order, or with a lump sum of R50 000.
The funds can be accessed directly or through various investment platforms.
Please see Our Funds for more information.
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