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Hedge Funds as Speculators

Before describing the speculative work of hedge funds on forex let us say a few words about hedge funds as organizations.

A hedge fund is a private investment fund not limited by statutory regulation and governed by the investment manager. Under the notion of “hedge” stands the idea of covering the risks of financial nature like price risks, interest-rate risks, currency exchange risks.

Americans view a hedge fund as a private investment partnership investing in publicly traded securities or in derivative financial instruments. There are two types of partners a hedge fund consists of. The major partner is a person who launches a hedge fund and is in charge of its daily activities. The limited partners fund their capitals without taking part in the trades and daily activities of a hedge fund. The major partner shoulders unlimited responsibilities in the partnership while the limited partners are responsible only for their own investments in the partnership. All the results of the hedge fund’s activities are spread between the partners proportionally with their participatory interest. There can be up to 99 investors who are able to get an access to a hedge fund.

A peculiar feature which distinguishes hedge funds from other investment organizations is that it is at much more liberty to choose an investment style. The investment strategies practiced by hedge funds do not only cover buying securities and hedging through stock options but also other various opportunities provided by the market of derivatives.

As far as forex is concerned, hedge funds function on the forex market mainly as speculators. Financial speculation involves buying and selling by anticipating profits from market fluctuations. There are no guarantees on the security of the initial investment as well as the return on the investment. In some cases financial decisions tend to have low safety margins and high risks of losing the initial investment. Speculators like hedge funds who enter the market have existing currency risks and their main purpose is to reduce these risks in order to profit. Hedge funds control vast amount of equity that can be used to buy and to sell currencies with the purpose of making money on each transaction.

It is necessary to emphasize that hedge funds pursue an aggressive financial policy with the help of the fundamental market analysis because forex is considered to be quite a risky means to reap benefits due to the fact that no currency tends to have a long lasting rising trend on the market. So it is rather difficult to predict where the currency will flow. That is why fundamental analysis is essential. How does it manifest itself? Let us draw an example. Japan. Tsunami. How will hedge funds react? They will play on the blue-chip drops of the Japanese – Toyota, Mitsubishi, Sony and make huge profits. Then they will wager on the currency’s pair USD/JPY drop and benefit enormously from it. After that they will find out what Japan consumes most of all. This is atomic energy and electricity. On this basis hedge funds will place a bet on the fall in energy stocks of those companies which collaborate with Japan. Then hedge funds will consider futures and generate profits if they bet on the rice price increase. All in all the amount of money can work out over 50 million dollars.

In conclusion it would be appropriate to say that if economic fundamentals are in hedge funds’ favor they can control billions of dollars of equity and may borrow billions more what can overwhelm intervention by central banks to support almost any currency.