Why Use a Forex Hedge Fund

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In these volatile times there is a lot interest in managed forex accounts and forex hedge funds. Currencies are more stable than either equities or commodities.

One of the primary advantages of hedge funds is the fact that they are unregulated. This adds a veil of secrecy to the whole operation. They can be blamed for significant market collapses. A hedge fund typically hedges it’s bets by holding both long (buy) and short (sell) positions. The whole idea is to minimize the level of risk by only investing in one direction.

Successful traders will often graduate to hedge funds when they are managing other people’s money. Although they are successful managing their own funds they want to have less risk when managing other people’s money.

There are a number of advantages to forex hedge funds as opposed to traditional hedge funds.

More Liquidity
The forex markets are extremely liquid. This means for the customer that they can withdraw their money from the funds at any times. Some traditional funds require a notice period before they will allow you to withdraw funds. For a property based fund it may be impossible to allow clients withdraw money as they may need to sell the property on which the fund is based.

Monthly Reporting
Forex hedge funds typically provide for monthly or even more frequent reporting. This will very be much be based on the nature of the fund. If they are following day trading type strategies, it would be possible to evaluate their performance over a weekly basis. Some funds will pursue medium term to long term strategies will could show considerable volatility over a shorter time frame.

Tiered Performance Fees
Some funds provide for a graduated or tiered performance fee structure. This is to encourage better performance. For example a 20% return would mean a fee of 10%, but a return of 30% would mean a fee of 20%. The whole idea of the fee structure is to encourage better performance from the manager. There is a danger that it can lead to excessive risk which needs to be monitored. For example if a fund has returned 20% throughout the year, a manager may be motivated to try and reach the 30% goal rather than protect his existing gains.

There has been very little regulation of forex funds. However new laws will mean Forex managers will have to have some basic level of qualification
Funds will have to provide disclosure documents
Funds will have to produce a compliance program for the NFA

Source by Al Alberto T Pearson