Hedge Funds

Written by Patricia Tunstall
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The speculator seeks risk in anticipation of great profits. The hedger avoids risk and seeks protection against unfavorable price changes. Hedging often involves securities and commodities, and futures contracts, options, and currency markets. The mix of maneuvers and markets requires intimate understanding of the various markets and their operation.

Risk management involves the proper selection of markets and moves at the right time. Money managers often use hedge funds in forex investments as protection against adverse movement in the forex market. Being an over-the-counter, off-exchange forum, the forex marketplace sees 24-hour-a-day dealings by banks, hedge funds, and corporations.

Hedge Funds Similar to Managed Accounts

Although the purpose of hedge funds and forex managed accounts is initially quite different, they are similar in that both depend on intelligent risk management plans. The global forex market is inherently perilous, and hedge funds and managed accounts are ways of diminishing exposure. Foreign currencies are on a floating exchange rate, with buyer and seller determining the value of a currency as against another currency at any one moment.

A perfect hedge would bar future gain or loss. The hedger, whether an individual or a firm, is willing to forgo the rewards from a favorable market movement in order to avoid the consequences of an unfavorable movement. Somewhat akin to a balancing act, hedgers try to offset the exposure inherent in any cash marketplace by taking an opposing position in the futures market.

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