Because of past problems with derivatives and hedge funds that led to big losses for investors and market volatility, the popular opinion of them is that they are risky investments. This does not necessarily mean the case, but the understanding derivatives and hedge funds is complicated. An incomplete understanding can lead to investments when losses become enlarged.

Hedge Funds

• Hedge funds seek to reduce volatility while preserving capital in all types of market environments.They are able to make it through a variety of investment techniques, including speculation and leverage. According Magnum funds, a hedge fund “can take long and short positions, use arbitrage to, buy and sell undervalued securities, trade options or bonds, and invest in almost any opportunity in a market where it foresees impressive gains at reduced risk. “Due to the different approaches that hedge funds can take, some are more risky than others. Among the techniques that a hedge fund can be used are derived.

No government Protected

• Although hedge funds are a collection of investments such as mutual funds, hedge funds do not have to be registered with the Securities and Exchange Commission.This means that there is no government oversight of industry other than laws against fraud and other financial regulation. However, most of these laws offer protection after a problem occurs. Registration and information requirements with the SEC can help investors avoid the problem of funds.

Derivatives

Derivatives are the result of a financial agreement where payment is agreed to certain criteria. Therefore, the only limits to derivative are those of the human imagination. Many derivatives are also using lever (optional) to increase the gain or loss resulting from a transaction. Leverage is a technique used to transfer risk in a transaction. You make a small investment before a market moves that you commit to a purchase much larger by a certain date. If the market moves in your favor you receive benefits based on the largest purchase, rather than the real value of your investment. However, if the market moves the other way, you incur losses as if you had invested the largest purchase.

Derivatives market

• The derivatives market was nearly $ 9 billion in 2005, according to CNN Money, but it does not necessarily represent the amount of money that changes hands.It is the amount on which the derivatives are based. An advantage of derivatives is that the risk is identified, it can be canceled by a derivative, which is sold to someone who is willing to accept the risk. The danger is that you are the only one to accept a high-risk derivative due to the attractiveness of a huge return.