1.What is a hedge fund? How do hedge funds differ from mutual funds?
According to our case, Hedge funds are private group investments that offer equity pooling advantages. Hedge funds have limited partnership which are restricted by law to no more than 1000 investors per fund, so hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million. Hedge funds not only require investors pay a management fee, but also collect a percentage of the profits (Investor words). Hedge funds can use multiple ways such as buying and selling undervalued securities and trading options and bonds to reduce risk for investors. Compared to Mutual funds, they are not publicly owned, less regulated, and more privileges. Also, it is have more flexible in investment strategies and risk management than mutual funds. Moreover, Hedge funds differ from mutual funds is their ability to use leverage and their ability to hedge by shorting or using options. Hedge funds can use leverage, but for most part of mutual funds cannot use leverage, so hedge funds can result in a higher return on equity by using debt to finance a portion of the assets in a portfolio. Furthermore, hedge funds have the ability to use options to hedge the of investors’ investment (Pine street capital).
2. What risks does PSC want to hedge and what risks is PSC willing to bear? Why? How would hedge these risks on July 26 using a short-sale strategy? What problems arise with the short-sale strategy?
One of the common investment strategies for Hedge Funds is to leverage those risks that they understand and hedge the risks where they feel they do not have enough expertise. Pine Street Capital specialized in the technological sector. Their competitive advantage lay in their ability to single out performing stocks in the technological sector. On the other hand, they did not feel too comfortable in assessing the movements of the market. As a result, their...
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