Question

Explain similiarities between hedge funds and absolute return fund

Answer 1

Absolute retuns funds are those funds whose ultimate objective is to earn positive returns for the investors regardless of the direction of movement of market. These are categorized under alternative investment vehicle.

Whereas, Hedge funds are those which pool funds of different investors that trade in relative liquid instruments and deploy differntiated strategies and trading practices to earn higher returns. These are also classified under alternative investment vehicle.

These two alternative investment instruments have some similarities as discussed below-

• the aim of both vehicles is to attaini higher returns and outperform the market to generate higher income for the investors.
• unlike other types of funds, these two funds deploy complex strategies to achieve returns even in the falling markets. They are allowed to use derivatives and short selling techniques.
• investment in these instruments are costlier as they charge high fees from their customers in the form of management fees ( based upon the net asset value ) and performance fees ( based upon the profits generated).
• Investments in these instruments is restricted to a certain section of investors based upon the risk perceived by these instruments and also these funds are not required to file as many documentation as the other traditional funds.