What is forex hedge fund?
A hedge fund, a pool of investments, allows traders to manage risk that is involved with trading. The volume of trades can be fluctuated which can’t be easy to check but you can control it by hedging. We can also learn several trading strategies which is practiced by hedge funds and incorporate them into our strategies. Before starting forex trading you must know about its riskiness. The most real truth is that nothing in forex trading is 100% secured. Hedging is a great strategy. And we should know vastly regarding this market. Without knowledge we must fail in this gigantic market where every day 6.6 trillion U.S dollar are being transacted.
A forex hedge is one kind of method that is implemented to protect an existing or anticipated position from an unwelcomed move in exchange rates. Forex hedges are being used by not only a broad range of market participates but also including investors, traders and businesses. If we use forex hedge properly, anyone who is long a foreign currency pair or expecting to be in the future via a transaction, we can protect them from downside risk. On the other hand, a trader or investor who is short a foreign currency pair, we can protect them from upside risk using a forex hedge.
Understanding a Forex Hedge
It should be remembered that a forex hedge is not money-making strategy but also to protect from losses even not to make only profit. Furthermore, more hedges are intended to eliminate a share of the exposure risk rather than all of it, as there are cost of to hedging that can compensate the benefits after a certain point.
Suppose, if a Canadian company is expecting to sell products in U.S dollars, it may defend a portion of the deal by taking out a currency option that will profit if the Canadian dollar growths in value against the dollar. If the transaction takes place vulnerable and the dollar strengthens or stays stable against the Canadian dollar, then the company is only out the cost of the option. If the dollar is weakened, the profit from the currency option can offset some of the losses realized when repatriating the funds received from the sale.
How hedge fund trade forex?
In terms of forex trading every hedge fund should have to be proved as a safe. They should have kept their investors money relatively safe and managed to generate a heavy return. It might seem peculiar as we have often seen that risk and profits are directly comparative to each other
By many different ways hedge funds trade forex. Some hedge funds do long term investments, some trade short time-based speculation. However, without technical indicators except for price levels and fundamental approach, most hedge fund managers use simple forex strategies.
Hedge fund employs the right mix of strategies. Best price difference between different currencies is made sure by these hedge funds. Though hedge fund is a larger organization even than a single trader, they have more strategies to find the markets’ insufficiencies and take advantages of that. It can be different with other hedge funds according to their strategies. Some have open strategies to develop according to the current market situations, others are dissimilar about their course of action.
Hedge funds and mutual funds are not similar that many traders equate. Though these dissimilarities are not prominent. Generally, hedge fund requires more minimum investment to trade in a balanced way. Their strategies are not set in together, which makes them riskier. Another thing hedge funds aren’t bound to disclose their total strategies to their clients. This kind of tendency might be dangerous.
We all need to know about the “Hedge Fund Currency Trading Strategies”
There are different types of hedge fund whose has different types of strategies, now we are going to discuss about the most common strategies make them successful. There are
1. Long / Short Strategy: Low-risk strategy involves lower leverage. At once you have to maintain both long and short trading positions when we are buying currencies that may be underestimated and sell the currencies considering overvalued. Pledging is a prolonged part of this strategy.
2.Market Neutral Strategy:
Holding equal long and short positions, some hedge funds neutralize the market to decrease the risk. As a result, we are doing lower risk and getting subsequent lower returns.
3.Macro-Economic Trends:
A popular strategy is that many hedge funds use macro-economic trends to create trading strategies. If the economic condition is affected by the value of its currency, this strategy is based on this fact.
4. Foreign Currency Options:
Without any obligation this option allows us to trade currency at a future date. Using this strategy short-term trades get protection. Some of the strategies are long term strangle, long-term straddle, bull spreads, bear spreads.
5. Momentum Strategies:
Using the historical patterns, the hedge fund strategizes involve a level of support, level of resistance, moving averages, oscillators & more. Every hedge fund knows it and looks for more scope
6. Carry-Style Strategy:
The speculators aspect for a currency that might be disparaging as it involves a lower borrowing cost. They let the fund to buy higher-yield currencies, like USD & GBP
We have mentioned some strategies above and its also truth that sometimes they don’t even use a single strategy according to the market condition. But majority hedge fund us one or more of those strategies. For an example, above mentioned carry-style strategy was buying USD that flopped in few years back.
Though this proves that while hedge funds help to reduce the risk of trading forex, they can’t abolish it at all. In fact, a hedge fund’s success depends on several factors like country’s political and economic condition and governmental issues and policies.
Anyway, if you don’t want to invest in a hedge fund, you can learn those strategies and trade with a hedge fund.