Role of Hedge funds

Question 1

How do hedge funds enhance market liquidity?

Answer 1

By actively trading across various markets, increasing the number of buyers and sellers.

Question 2

What role do hedge funds play in price discovery?

Answer 2

Their research-driven trades help correct mispricings and reveal true asset values.

Question 3

What types of strategies do hedge funds use?

Answer 3

Long/short equity, global macro, event-driven, and arbitrage strategies.

Question 4

How do hedge funds handle risk in markets?

Answer 4

They absorb complex risks that others avoid and offer customized risk-transfer tools.

Question 5

Why are hedge funds valuable for portfolio diversification?

Answer 5

Their returns often have low correlation with traditional assets, reducing overall portfolio risk.

Question 6

What is market arbitrage by hedge funds?

Answer 6

Exploiting price differences across markets to ensure alignment and efficiency.

Question 7

Can hedge funds increase systemic risk?

Answer 7

Yes, especially if they use high leverage or are forced into rapid sell-offs during crises.

Question 8

What is activist investing by hedge funds?

Answer 8

Buying large stakes in companies to push for changes that boost shareholder value.