What is Hedge Fund with Examples

What is Hedge Fund ?

The Hedge fund investment strategies aim to achieve a positive return on investment regardless of whether markets are rising or falling (“absolute return“).What is a Hedge Fund Hedge funds are alternative investments using pooled funds that employ numerous different strategies to earn active return, or alpha, for their investors. A hedge fund is an investment fund that pools capital from accredited individuals or institutional investors and invests in a variety of assets, often with complex portfolio-construction and risk-management techniques.

Lets go with some Examples in real Market how Hedge funds are used.

Hedge fund – Case Study Fixed Deposit 

Mr. Krish is a NRI. He plans to invest FD in India interest per year 5% . Krish is planning to invest Rs 5,00,000(USD $7042, Rate USD/INR Rate 71) with 1 year of contract. Currently he is working in US. Now the dollar exchange rate is 71. After One years it might be differ so Krish decide to go for Hedge his fund as he don’t want get affected due to market volatility .

In that case, Krish will transfer $7042 to Indian, hence Mr.Krish Selling USD against INR for One year, after One year he will receive USD, therefore he is going to sell INR against USD after one year. He can Sell(Hedge) USD now till the fixed deposit maturity ends, after that he can close his fixed deposit as well as close(Buy) hedge funds. 

Hedge Fund – Case Study Export Import 

KV Groups is an Australian company, its exporting wheat to Canada and getting paid on regular basis after product delivered. Bill amount has been quoted in AUD when product has been shipped. Usually products will be delivered in two days. But unfortunately natural disaster after Australia after shipment. Due to natural disaster, transportation team informed that shipping will be delivered two weeks later than usual delivery date.

In that case both the Canadian company will face difficult to receive goods as well as Australian company will face difficulty to receive Canadian dollars, hence Canadian company said will transfer the money once receive the goods, therefore Australian company will go for hedge to avoid the changes of currency exchange rate, Australian company will go for hedge by Buy Australian dollar against Canadian dollar.

Hedge Fund – Case Study Salary Person

Mr.Haruto is a Japan citizenship, he working in China. He is earning salary as 10,000 CNY per month. Six months once he will transfer his salary to family. The exchange rate is variable day by day. But Haruto don’t want to get in variable rates. So he decided to hedge to avoid rate difference when he transferring fund to Japan.

To avoid the changes of currency exchange rate, Haruto goes for hedge fund. He is selling JPY against to CNY for six months contract. 

Hedge Fund – Case Study Rental/Lease

Mr’s.Lorraine having own house in California. Her spouse working in Canada. So she plans to shift for Canada. She gave her house to Mr.Michael for lease. The lease amount is $25,000. After a year Michael will return the lease amount to Lorraine.

In this case, Lorraine goes for hedge to save the fund from exchange rate difference. To avoid the changes of currency exchange rate, Lorraine did hedge by selling CAD against to USD.