Defining Hedge Funds and Pension Funds
A fund is a sum of money or resources allocated for a specific purpose. In the business industry, there are so many types of funds that it can be quite confusing. Here, we will discuss the distinction between two popular kinds of funds – the hedge fund and the pension fund.
First is the hedge fund. A hedge fund is an investment vehicle – meaning it is used as a means to make a profit from the capital invested in it. The main objective of an investment fund returns. Hedge funds can involve limited partnerships or limited liability partnerships. They require fewer regulations than pension funds but incur higher risks and more complex portfolio arrangements.
Frequently, hedge funds are confused with mutual funds as well. Mutual funds involve the management of portfolios as well. Investors put their money into the portfolio, each of them owning a share of the fund. Mutual funds are limited to management of stocks and bonds, whereas hedge funds can also involve commodities, real estate, and other securities.
Hedge funds make use of leverage. Leverage is an investment technique wherein the money used comes from borrowed funds. There is a higher risk of loss in this case. However, the potential to gain returns is also much more significant. In actuality, one of the primary objectives of a hedge fund is to limit losses and reduce risk. Thus, the term “hedging” means to lessen risk.
But isn’t there that saying that states that the more the risk, the more the return? Hedge fund managers employ sophisticated strategies to reduce risk without affecting the potential for investment income. Leveraging is one of the techniques often used by fund managers. Another is derivatives. Derivatives are financial securities that base value on the underlying assets.
Pension funds have simpler structures than hedge funds, albeit receiving more regulations than the latter. Pension funds involve the employees of a state, company or organization and are made with the end goal of retirement income. Employees are the beneficiaries of a pension fund.
Money is put into the fund by the beneficiaries over time. Employers may also place contributions into the pension fund. Pension funds can generally be divided into two types – the Defined Benefit Fund and the Defined Contribution Fund.
The Defined Benefit Fund requires payment of fixed income. This protects beneficiaries from any variables that can change the value of the funds as returns are not affected by such. The company managing the pension fund sustain any risk faced by the fund to guarantee benefits to employees. The federal government plays a role in this in the form of the Pension Benefit Guaranty Corporation.
Meanwhile, the Defined Contribution fund is the opposite – benefits are dependent on the performance of the fund. Companies are not required to match the expected benefits if the value of the fund drops. Instead, risks are transferred to the employees. Examples of this type of fund are 401(K)s and 403(b)s.
Economic and socio-demographic factors can affect the value of pension funds. On the other hand, hedge funds also face variables that can make risk reduction more challenging. Conventions and expos such as the Nordic Pensions & Investments Summit 2010 aim to educate asset owners regarding these matters.
Funds, insurance companies, and foundations in the region are gathered together to listen to and discuss topics covering pensions, hedge funds, and other alternative investments. The Nordic Pensions & Investments Summit 2010 was also opened to senior investment officials to discuss matters concerning real estate, infrastructure, private debt and equity, and hedge funds. Significant issues in the present environment are also considered to provide more in-depth knowledge and strategy to manage pension and hedge funds effectively.