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Introduction to Financial Risk in Stock Investments
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Traditional Asset Classes in Hedge Funds

Although many hedge funds pursue strategies and assets known only to a well-informed few, most funds have some investment positions in ordinary investment classes. You may be surprised that these funds don’t look much different from what you would see in any investment portfolio.

A stock (also called an equity) is a security that represents a fractional interest in the ownership of a company. Hedge fund managers often buy and sell stocks in order to meet their investment objectives.

A share of stock has limited liability, which means that you can lose your entire investment, but no more than that. If the company files for bankruptcy, creditors can’t come after shareholders for the money that the company owes them.

A company or a government issues a bond in order to raise money to cover expenses or investments that can’t be funded out of current income or savings. As a bond holder, you are essentially a creditor to the issuer of the bond. Hedge fund managers invest in many different types of bonds at different times; it all depends on the fund’s investment objectives, what techniques the fund uses, and the prices in the market at any given time.

Hedge fund managers have money readily available to purchase securities for the portfolio or to meet customer redemptions. For the most part, the interest rate on cash is very low, so hedge funds try to keep as little cash on hand as possible. However, they do look for some cash and cash-equivalent investments that can pay off handsomely. Other forms of money market securities include the following:

  • Short-term loans, collectively known as money market securities or cash equivalents, which are expected to mature within 30 days or even overnight

  • Long-term bonds that are about to mature (say, a bond issued 15 years ago that matures next week)

  • Uninsured bank CDs

  • Government securities that will mature within 90 days

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