What is a hedge fund and what is the difference with traditional funds?

The English name of Hedge Fund means "hedge fund", which originated in the United States in the early 1950s. The purpose of its operation is to use financial derivatives such as futures and options, as well as the operating skills of buying and selling different related stocks and hedging risks, which can avoid and resolve the risks of securities investment to a certain extent.

In the most basic hedging operation, the fund manager buys a put option with a certain price and term after buying a stock. The utility of put option is that when the stock price falls below the option-limited price, the holder of seller option can sell his stock at the option-limited price, thus hedging the risk of stock decline. In another hedging operation, the fund manager first chooses a certain kind of bullish industry, buys a few good stocks in this industry and sells a few bad stocks in this industry according to a certain proportion. The result of this combination is that if the industry is expected to perform well, the increase of high-quality stocks will exceed other stocks in the same industry, and the income from buying high-quality stocks will be greater than the loss caused by shorting inferior stocks; If the expectation is wrong, the stocks of this industry will fall instead of rising, then the stocks of poor companies will fall more than the high-quality stocks. Then the profit of short selling will be higher than the loss caused by the decline in buying high-quality stocks. Because of this mode of operation, the early hedge fund can be said to be a form of fund management based on the conservative investment strategy of hedging.

After decades of evolution, hedge funds have lost the original connotation of risk hedging, and the title of hedge funds also exists in name only. Hedge fund has become synonymous with a new investment model, that is, based on the latest investment theory and extremely complex financial market operation skills, making full use of the leverage of various financial derivatives, taking high risks and pursuing high returns.