Hedge funds - how they work
13 April 2012
Hedge funds have been around for more than a decade - George Soros famously ran one that broke the pound during the Exchange Rate Mechanism crisis in 1992 - but have only recently become a dominant City force.
- They use sophisticated financial instruments to bet or "hedge" against falls or rises in currency and stockmarket prices, rather than simply waiting for them to rise.
- As stockmarket values collapsed after the Nineties boom, more investors turned to hedge funds to make money for them.
- Once regarded as rather racy investment vehicles, hedge funds now increasingly attract money from mainstream pension funds and insurers. This week, even the mighty BT company pension scheme said it is to invest in them for the first time.
- Like any investment managers, hedge funds look after money on behalf of clients - some institutional, some wealthy private individuals - and try to make them a return.
- Traders who moved out of mainstream banks into hedge funds have been able to make huge profits themselves, although many have fallen by the wayside. They typically charge a two per cent basic fee plus 20 per cent of all profits made for the investor, although London Diversified charges 25 per cent.
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