Abstract
A HEDGE FUND is a securities fund which not only buys stocks for long-term price appreciation but also sells stocks short. The concept of short selling is injected to reduce risk during periods of market decline. The emphasis is on maximizing stock market selection, i.e., buying stocks with above average prospects and selling short stocks which appear overpriced based upon investment judgment. The leverage of borrowed money is used to maximize capital gains. As the fund continually will be short a certain percentage of invested capital, a fully invested investment posture generally is maintained. Hopefully, the elimination of market risk will be attained by being long and short the market in varying proportions over a period of time. The long-term objective of a hedged fund is comparable with any equity fund, namely, long-term capital gain through investment in fundamentally attractive industries and companies. The hedge fund adds the concept of negative polarity (short selling) and commonly the leverage of borrowed funds.
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