Understanding Hedge Funds: Strategies, Risks, and Impact on Global Financial Markets

Introduction

Hedge funds have long been a subject of intrigue and controversy within the financial sector. Characterized by their diverse investment strategies and relatively unregulated nature, these funds have been pivotal in shaping modern financial markets. This paper aims to explore the various strategies employed by hedge funds, the inherent risks associated with these investment vehicles, and their overall impact on global financial markets. By examining these facets, we seek to provide a nuanced understanding of hedge funds, shedding light on their role in both enhancing market efficiency and contributing to systemic risk.

Hedge Fund Strategies

Hedge funds employ a myriad of strategies that distinguish them from traditional investment vehicles. Common strategies include long/short equity, event-driven, macroeconomic, and quantitative trading. Long/short equity strategies involve buying undervalued stocks while short-selling overvalued stocks, allowing hedge funds to profit in both rising and falling markets. According to a 2020 report by Preqin, long/short equity remains the most popular