Unless you represent your company's pension fund, or are an extremely wealthy individual, you will not be eligible to participate in a hedge fund or need to select a hedge fund accountant. You still may find the need to comprehend how a hedge fund works if you are searching for a better understanding of how your company's pension fund functions. A hedge fund manager handles an actively traded account or fund, on behalf of a group of individuals. Shares in the fund are purchased by investors wishing to get involved in the fund. Typically a hedge fund manager will also buy shares and participate in his own fund. The managers fortune and his clientele, are tied together.
How the hedge fund operates is what sets it apart from other funds. As an example, a mutual fund is designed to be stable with constant, modest return on investment. A mutual fund, just like a hedge fund, is open-ended, meaning money may be withdrawn and deposited throughout the participation. By investing in reliable, positive-growth companies, utilities as an example, a mutual funds principal grows. A mutual fund purchases stock only, and it does not engage in short sales. If a mutual fund is more aggressive they may look to target higher growth organizations, in the technology sector for instance and gain a slightly higher return for a slightly higher risk. The problem with a mutual fund would be that it will generally generate losses in a recession. The retirement accounts based on mutual funds this decade have taken a huge hit due to the economic downturn.
In contrast, a hedge fund runs very diversely. The hedge fund has the freedom to not only purchase stocks long, but to sell stocks short in the instance of an economic downturn. Irrespective of the state of the economy, hedge funds usually have a positive return on investment (ROI). As the basic law of finance says, with the hedge funds higher return rate, always comes a higher risk. The use of the shorting strategy is part of the hedge funds higher risk. When an investor buys long, they will never lose any more than their financial investment. However, when an investor buys short, he can lose a lot more than his investment and actually obtain a debt. The expertise for controlling this risk and properly forecasting economic growth and downturns is much more difficult than just choosing high-growth companies. For this reason it is so important to examine the credentials for any possible accountant for the hedge fund.
Another tactic used by a hedge fund broker is leverage. Leveraging happens when you purchase a certain stock for only a fraction of its actual worth. The stockbroker makes up the difference, expecting that the stock price will not deviate enough to threaten his participation. The ratio of the value of the stock to the level of the investment is definitely the leverage. If the leverage had been 2:1, then a growth in stock of 1% would yield a return on investment of 2%. It is also possible for a hedge fund manager to work with a 10:1 leverage or higher. This gives them the opportunity to realize huge profits. It also signifies that there is a real risk of huge losses.
There are two things that investors use to qualify an effective hedge fund accountant: long-term ROI and draw downs. 20 years is a good time horizon minimum amount. In that time, you can examine the ROI from start to end, in other words, the present day return on an investment made and held 20 years ago. It's also wise to watch negative deviations from a straight upward line of growth. These deviations are referred to as draw downs. The account is recognized as a substantial risk if its draw down is more than 20%
To truly learn about hedge funds, one must do far more research. However, this information will get you started in understanding basic hedge fund operation.