20% of the volume traded in forex is accounted for by hedge funds

Needless to say, this is an important use of the forex market.

However, before getting into how forex can be used for hedging, let’s quickly go over what hedging and a hedge fund is.

Hedging

Hedging is a method for investors to secure their investments. From fear of incurring losses on one investment, they invest in a counter commodity or area. Therefore, it serves as a kind of security, an insurance of sorts.

 

 

In stocks there is also another way to hedge. When buying a stock, if the trader hedges it with a put option it will allow the trader to sell it at the same rate should the stock price go down.

So, hedging is a security measure that investors take.

Hedge Funds

These are funds provided by an investor, or a pool of investors, and put into different assets under some high level management by professional hedge fund managers.

They are different from other investment or mutual funds in that they are not regulated like the others are and so there’s more room to be creative

 

 

The hedge fund managers are free to invest in anything they see fit (even art, if that seems like a good investment) and they can apply any strategy.

This type of investment is not for the average Joe though. Because there are fees involved and a lot of risks, usually only seasoned and experienced investors will look into this sort of thing.

How can it be done in forex?                                                                  

A hedge fund is invested in forex using any of the various trading contracts offered in the market. It can be done through futures (which are contracts setting a time a date for when a particular trade will be made), or even spots (shorter term trading contracts). Any instrument may be used

 

 

Those who invest their money into a hedge fund, do not trade in forex themselves. The managers of the fund are the ones who are the experts and who will be dealing with the market.

For this responsibility and work that is given to the manager, they will of course be paid a fee, and often a part of the overall profit made.

If you are someone who is thinking about trading hedge funds in forex for others the following points should put things in perspective on whether it is a good idea or not.

• Are you ready to take on this duty? A self-analysis is in order. When someone trades their own money in forex, losses might be hard to deal with but there is no accountability as the money invested is yours.

On the other hand, when you’re trading a hedge fund, you are basically trading with other people’s money and they offered it to get returns on it. Therefore, you really need to have thorough understanding and knowledge of the market along with a fair bit of experience before you take this sort of thing on.

• Take into account hurdle rates. Hurdle rates require a certain level of return requirement to be fulfilled before compensation is considered due. There are State laws about hurdle rates so you will need to take a look at those before getting into it.

This means that unless you’re able to generate a certain level of return on the investment, you are not eligible for compensation (i.e. a fee).

• Have you taken the legal measures? For example, the first person you need on your team if you’re looking into doing this is a specialized

Since there are multiple parties involved, there has to be a legal agreement to avoid any issues or misunderstandings in the future.

There will also need to be certification and you will be required to register yourself as a hedge fund manager.

Then there is the issue of taxes. You will be required to regulate taxes as well to make the practice legal.

Even though to a great extent hedging provides free reign to the hedge managers to invest the money as they please, in order to keep it legal and lawful, there is some paperwork and legalities involved. Before deciding to do this, therefore, the trader should take into consideration that this is forex trading at a higher level and there are more people and stakes involved.

The other thing is that it will require a certain level of expertise from the manager. Newbies should definitely not try to start with this.

Hedging is a very lucrative business, given the hedge trader is going in with the right preparation and tools.