"In Oxford English Dictionary, we find that "To Hedge: To secure against loss"

Alternative investment is a term commonly used by investors to describe managed investments utilizing strategies other than simply buying and holding stocks and bonds. We will sometimes label the kind of investment as "hedge fund".

Hedge fund can take both long and short positions, use arbitrage, buy and sell undervalued securities, trade options or bonds, and invest in almost any opportunity in any market where it foresees impressive gains at reduced risk. Usually, alternative investment fund has several characteristics to distinguish itself from traditional investment fund,

Comparison of Alternative and Traditional Investment Funds

Hedge Fund's Style and Objective

There are many different investing styles and strategies of hedge funds, some of which are quite unique. However, it is crucial to understand the differences between the various hedge fund strategies as investment returns, volatility, and risk vary enormously among the different strategies. Some strategies which are not correlated to equity markets could be able to deliver consistent returns with extremely low risk of loss, while others may be more volatile than traditional investment tools.

1) Global Macro
Invests by making leveraged bets on anticipated price movement of stock markets, bond market, interest rates, foreign exchange, physical commodities or any other kinds of investment opportunities that considered to be profitable under the market situation.

2) Equity Hedge
Combine core long holding equities with short sales of stocks or index Options. An equity hedge fund may be global or country specific, hedging against downturns in equity markets by shorting overvalued stocks or stock indexes. A relative value hedge fund takes advantage of price or spread inefficiencies. Through a market neutral strategy, some investment managers invest equally in long and short equity portfolios generally in the same sectors of the market. Leverage may be used to enhance returns. Usually the strategy demonstrates low or no correlation to the market.

3) Relative Value
Take advantage of relative mis-pricing between securities including fixed income arbitrage, convertible bond arbitrage, mortgage- back securities arbitrage, derivatives arbitrage. Take for instance, one can long convertible bonds and short the underlying issuers equity. One may also use futures to hedge out interest rate risk. The hedge fund managers focus on obtaining returns with low or no correlation to both the equity and bond markets.

4) Event Driven
Take advantage of corporate events such as merger and acquisition, hostile takeovers, reorganizations, or leveraged buyouts. Typical examples include merger arbitrage, distressed securities, special situations, high yield and bank loans. In the case of distressed securities, hedge fund managers will buys equity, debt, or trade claims at deep discounts of companies in or facing bankruptcy or reorganization. Profits from the market's lack of understanding of the true value of the deeply discounted securities. Results generally not dependent on the direction of the markets.

5) Managed Futures
Trades in the world-wide futures markets ranging from global financial instruments such as bonds, stock indices and currencies to commodities such as coffee and crude oil. Managed futures instruments represent an industry comprised of professional money managers "known as Commodity Trading Advisors (CTAs)" who manage client assets on either a systematic or discretionary basis. These traders use the global futures market as an investment medium and generally trade on a short-term basis.

6) Fund of Hedge Funds
A fund of hedges fund is a fund that blends various strategies and asset classes together in order to secure a more stable long-term investment returns than any of the individual funds. Returns, risk, and volatility can be controlled by the mix of underlying strategies and funds. Capital preservation is generally an important consideration. Volatility depends on the mix and ratio of strategies employed.

Why Hedge Funds?

Some academic researches show that hedge funds achieved higher returns and lower overall risk than traditional investment funds. Many alternative fund strategies place emphasis on positive return in both rising and falling stock and bond markets. Since alternative investments have been able to offer enhanced portfolio performance under all market conditions, often overcoming even negative conditions, hedge funds and other alternative investments could maintain more stable performance than traditional stocks and bond funds.

For many institutional investors, to diversify the portfolio risk is one of the key motivations of investing in alternative investment products. In addition to their ability to generate higher returns, hedge funds show a low historic correlation to traditional investments. Because of their flexibility to use full range of investment instruments and techniques, hedge fund returns are somewhat independent of the ups and downs of the market. As a result, inclusion of hedge funds in a balanced portfolio is able to balance overall portfolio risk and volatility and should increase returns.

As the industry becomes more mature and the demand for this category of fund becomes higher and higher, there is huge variety of hedge fund investment styles available. It enables investors to have a wide choice of hedge fund strategies to meet own investment needs and financial planning.

Performance of many hedge funds depends on the skills and experience of the fund managers, not only the intrinsic value of the underlying investment. Hedge fund thus provides an ideal long-term investment choice, eliminating the need for one to guess the entry and exit timing for the market.

Mis-concept on Hedge Fund

Alternative investment fund or hedge fund is an investment tool which has very high risk and an investor may lose all his investment by putting money into the hedge fund.

Hedge funds vary enormous only in terms of investment returns, volatility and risk. Instead of making use of unlimited leveraging power, many hedge fund strategies tend to hedge against downturns in the markets being traded. Many hedge funds even have as an objective consistency of returns and capital preservation rather than magnitude of returns. Most hedge funds use derivatives only for hedging or even don't use derivatives at all, and many use no leverage. As many hedge funds have the ability to deliver non-market correlated returns, adding hedge fund into the portfolio will in fact lower the volatility without scarifying the potential return of the investment. That explains why many pension funds, endowments, insurance companies, banks and high net worth individuals invest in hedge funds to minimize overall portfolio volatility and enhance returns.

Hedge fund investment is only available for institutional investors who could invest millions of dollar.

More and more hedge fund products are now opened for individual investors. However, as the nature of investment is new to many investors, knowing and understanding the characteristics of the many different hedge fund strategies is important before making any investment decision.

Common Problems for Investing in Hedge Funds

※	Very rich only
	The common misconception is that hedge funds, especially the most successful, are reserved for the very rich who are willing to pay comparatively higher fees for better absolute returns. It is generally the case that this class of people prefers their accumulated wealth not to become a subject of public discussion.

※	Black Box
	To meet their needs, the legal and regulatory structures of hedge funds are commonly not burdensome as regards the disclosure of financial and operational data. However, to prevent the secret of a fund?ˉs success from becoming generally known, that hedge funds sometimes seem to be working in a ?°black box?±. Even though the passage of time has changed, it is only at a snail?ˉs pace, and interested investors still find it hard to be well informed on hedge funds investment.

※	No Benchmark
	Investors can rarely look to any widely recognized benchmark to help them measure the respective performance or risks of hedge funds, comparable with those commonly available to measure the performance of unit trusts and mutual funds. Certainly, owing to the unique investment techniques or approaches adopted by different hedge fund managers, a uniform way to accurately identify the best hedge fund managers is still in the realm of wishful thinking.

※	Due diligent work
	The skills required to select the best performing hedge fund managers are critical, but mastering them is more easily said than done. Only time, effort and devoted study can enable one to find the proverbial needle among the undifferentiated mass of haystacks in the market. The diligent comparison of hedge fund managers as a key element in the selection process is costly and complex.