By Pratima Desai
LONDON (Reuters) - Confusion about what hedge funds are is widespread and often adds to their notorious reputations for being risky, but the concept is really simple, speakers at the Reuters Hedge Fund and Private Equity Summit said.
As with most things, there are exceptions, but the majority are trying to make money using tools such as derivatives and short selling -- betting on a lower price for a security in the future -- to cover downside exposure, they said.
"They use hedging strategies in order to protect performance and ultimately are looking to generate alpha (excess returns regardless of market movements)," said Nicholas Roe, managing director and European head of equity finance at Citigroup.
"Hedge fund is such a generic term, you can get lost trying to analyze what it is."
Some describe hedge funds as lightly regulated investment pools because most are registered in low-tax offshore centers such as the Cayman Islands.
However, the reason hedge funds are registered in offshore centers is so they can use derivatives and short sell. Most onshore jurisdictions do not allow investment funds to make effective use of these tools.
"The practice is something that people in financial markets have been doing for decades in some shape or form," said Ted Platt, head of global equity finance and services for EMEA at Merrill Lynch.
So can investment banks that allow traders to gamble with their capital also be called hedge funds? Continued...
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