Global Financial Markets Essay Example

and profit by investing in instruments that are most influenced by these trends. These investors participate in all major markets, leveraging and using derivatives to amplify market moves. However, this use of leverage on directional bets, which are often not hedged, can result in high volatility for some macro funds. As a result, macro investing is seen as a high-risk strategy.

According to Friedland (2006), the media tends to exaggerate how often well-known hedge fund managers experience significant losses. Despite using different approaches, macro hedge fund managers share some similarities in their investment strategies. These include investing in multiple sectors and trading instruments, as well as being opportunistic and responsive to shifts in economic policies, political climates, or interest rates. Hedge funds have the potential to generate positive returns even during falling equity and bond markets, making them advantageous for investors.

Investors can enhance their portfolio by including hedge funds, which can decrease risk and volatility while increasing returns. The broad range of available hedge fund strategies offers non-correlated options, enabling investors to choose a strategy that matches their investment objectives. Academic research has confirmed that when compared to conventional investment funds, hedge funds have lower risk and higher returns. Hedge funds are an excellent option for long-term investments as they remove the requirement for efficient market timing.

According to Friedland (2006), adding hedge funds to an investment portfolio provides diversification that is not offered in traditional investment methods. Hedge funds employ various hedging strategies, such as selling stocks without ownership, using arbitrage to take advantage of pricing inefficiencies between related securities, trading options or derivatives based on underlying financial assets, and investing in anticipation of

specific events like merger transactions, hostile takeovers, spin-offs, or exiting bankruptcy proceedings.

Investing in deeply discounted securities is a common practice among hedge funds, particularly those focused on companies in financial distress or bankruptcy. These securities are often valued below their liquidation value. Additionally, many hedge fund strategies benefit from being non-correlated to equity markets. As noted by Friedland (2006), the popular misconception that hedge funds are all volatile and rely heavily on global macro strategies with substantial directional bets and leverage is untrue. In reality, less than 5% of hedge funds operate as global macro funds.

In general, hedge funds prioritize an absolute return strategy that aims to generate profits across different market conditions. While some hedge funds may use derivatives for hedging purposes or not use them at all, many do not utilize leverage. Conversely, registered investment companies typically follow a relative return approach whereby they strive to match or outperform a specific asset class or securities index.

In the text, Carol Loomis discusses the difficulties faced by hedge funds in the 1970s, as noted in her article "Hard Times Come to Hedge Funds". Meanwhile, Dion Friedland speaks about global macro investing in his publication "Global Macro Investing" from Magnum Funds, available at http://www.magnum.com/hedgefunds/globalmacroinvesting.