Cryptocurrency is one of the most misunderstood and volatile securities that you can trade. It is a new instrument. Though it is believed to have been invented in 2009, cryptocurrency was under the spotlight throughout 2017. This was because of a sudden spike in the value of Bitcoin. In addition to that, other coins like NEM, and Ardor were also gaining popularity. This sudden appreciation in the value of cryptocurrency highlighted its volatility and attracted the interest of conventional financial institutions.

This popularity reached a different height when CBOE, NASDAQ, and CME announced that they will be listing futures contracts in the most popular crypto, Bitcoin. In 2017, the price of Bitcoin increased by 1500%. Traders were eager to invest in crypto and this led to a growing demand for the establishment of crypto hedge funds. Till 2016, there were just a few crypto hedge funds that grew to nearly 120 within the next year.

Volatile instruments are tricky to understand but once you are educated enough to understand their price movements, you can earn a considerable profit. More traders now want to employ this instrument. You can deal with crypto by holding, mining, or trading it. However, let us warn you that the mining algorithms of this instrument continuously become complex. Not everyone can do it. Newcomers feel intimated. This is one of the most crucial reasons why setting up a crypto fund was the need of the hour.

What do You Understand by a Cryptocurrency Hedge Fund?

A cryptocurrency hedge fund refers to a portfolio that contains a variety of different digital assets, cryptocurrencies. It is usually managed by one or a few individuals. Investors and traders can buy these funds so that they can share in the profits as the value of the fund grows.

These funds can be initiated by anyone. They need to introduce new crypto that can be offered to the investors and helps them in earning more profits. These funds can be public, private, or hedge.

These funds provide the necessary exposure to the investors with regard to the cryptocurrency. These funds can also support new ventures who are looking out to enter the market by using blockchain technology or to update the existing methods of how these currencies are mined and validated.

Crypto Fund Set-Up – All You Need to Know

A crypto fund set-up might not be as straightforward as you might expect. If you wish to start your own fund, keep in mind the following factors:

• The primordial reason for starting this fund is to provide a platform to the investors where they can trade crypto. Therefore, before you invest in your fund, do your research to check if the investors will be interested in participating in your fund or not.
• The next aspect is to identify the sources of investment and how you will strategize these investments for maximum benefit.
• Never underestimate the legalities involved in the trading market, especially in cryptocurrency. Refer to professionals and make sure to put all the agreements into place.
• The regulatory requirements issued by regulatory bodies like CFTC, SEC, and IRS, constantly updated. Make sure that your fund’s operations comply with all the rules and regulations. These regulations are subject to change and vary from country to country. You need to work in accordance with these regulations, else you will be shut down.
• Infrastructure demands considerable investment. Keep that in check.
• Consult a professional to understand the tax ramifications that are associated with crypto funds. In some countries, like Luxembourg and Switzerland, the tax laws related to crypto are more relaxed.
• You also need to devise a way to manage the volatility that comes complimentary with crypto trading. 
• Finding ways to manage the risk and volatility involved in the trading of cryptocurrencies is also needed. This could include trading in futures.

Be practical in your approach while starting a crypto hedge fund. Know about all the risks and liabilities that will become a part of your journey. One must be absolutely certain about the legal aspects of opening a crypto fund. You need to follow every rule to the word. It is also advised to have a professional lawyer and a chartered accountant by your side. They will make sure that your hedge fund stays on the legal side and does not get into any trouble.

We have moved away from traditional trading. A number of instruments and securities at our dispense and the development in the field of technology have positively altered how traders, investors, and brokers interact in the market. Even if you are someone who prefers to trade stock market indices, the way it can be done now is very different from what it used to be two decades ago. If you wish to invest in the stock market, you must gain some exposure to a stock index. This is a cost-effective and easy way that offers instant diversification. 

You can receive more benefits from trading indices instead of individual stocks as indices introduce you to the entire industry. Trading individual stocks are more demanding because you are required to read the report of individual companies and then compare them to identify the trends. This is a complicated and time-consuming process that can be eliminated when you are focusing on the industry at large. Another major benefit of trading indices is that you don’t have to worry about the underperformance of one company as it can be negated by the outperformance of some other company. You need to focus on the average of the industry here. This point also makes indices less volatile as compared to individual stocks and hence, makes index trading comparatively safer. 

Not everyone is comfortable to directly investing in an index, especially new traders. If you belong to this lot, you can consider an indirect investment. This can be done in the form of CFDs and ETFs. Let’s explore the two alternatives individually to conclude which one is better.

Index ETFs

ETF stands for Exchange Traded Funds. These are similar to mutual funds that can be traded on an exchange similar to common stocks. Index ETFs are hailed as ideal trading instruments since their creation. These stand for the indirect ownership of assets like stocks, bonds, currencies, and other commodities. Assets that are similar in nature are paired together in Index ETFs. For example energy stocks and agricultural instruments. Traders are supposed to choose ETFs that are sector-specific and then invest. In comparison to mutual funds, you get lower fees and higher daily liquidity. This is why more investors are drawn towards ETFs.

Index ETFs do not give ownership of the asset to the investors. They are supposed to speculate on the movement related to the said index. Index ETFs are more suitable for investors who are looking to make short-term profits, though it involves a higher degree of risk as compared to long-term ETF investments. 

Index ETFs offer diversity which is appreciated by today’s investors. You get high liquidity at a relatively low fee as these are traded on a public stock exchange. The list of benefits doesn’t end here. You also get capital gains tax exemption because of their public disposition, reasonable liquidity, and special dividend treatment. If you are an ETF trader, you can expect a lower commission from brokers.

If you have sufficient capital and don’t need high leverage, investing in an ETF will be the best option for you. You will get the opportunity to completely utilize your capital without taking a huge risk. ETFs are balanced by their components because when the value of one instrument goes down, the other’s appreciate.

Dollar-cost averaging, asset allocation, betting on seasonal trends, hedging, swing trading, sector rotation, and short-selling are some ETF trading strategies that offer a number of features. Beginners and novice traders will find this useful.

Index CFDs

While the ETFs have been around for a while, the CFDs are newer derivative financial instruments. CFDs, contracts for difference, are derivatives products that allow traders to trade on live market prices without owning the trading instrument. The investor is asked to pay 5-10% of the underlying asset when they open a position. A CFD contract does not expire. You can renew it after each trading day if you feel that the position is benefitting you.

Investors prefer CFDs as these instruments minimize the risk factor by spreading the investment across an entire segment instead of concentrating it on a particular company. As your investment is diversified, most of the factors that could impact your investment are taken care of. You will get both market and instant execution options with CFDs. you will get fast and easy trading as your orders are executed on time. You need to speculate on the direction in which the prices of assets will move. Based on these speculations, the investor signs the contract to exchange the gap in the initial and final prices of the assets. Speculation can be made of both falling and rising markets. Since the CFD collection is one of the biggest registered stocks on a stock exchange, you get global market access, higher leverage, lower transaction cost, and non-stop trading.

CFD vs ETF

The major difference between CFD and ETF are:

• While both Index ETFs and Index CFDs were introduced in the 1990s, the former has been around for a longer period of time.
• An investor is required to pay the full amount of the underlying asset as leverages are not common in ETFs but in Index CFDs, you are supposed to pay 5-10% of the asset.
• Since there is no leverage in ETFs, your account can never go negative as you can only lose the amount that you have invested. Such is not the case with CFDs. You can lose more and get into a debt-trap if you are unable to manage the leverage.
• You will not be charged any interest on the ETFs as long as you hold them. As CFDs are margined products, you are required to pay interest for the period that you hold them.
• You can make both short-term and long-term investments using ETFs but these are generally used by investors who are hoping for steady smaller gains stretched over a period of time. CFDs are mainly used for short-term gains.
• Since your broker will offer leverage on CFDs, you can make higher profits on CFDs as compared to ETFs. However, ETFs involve limited risk as compared to the CFDs.

Before you choose one of the above instruments, you must educate yourself about the underlying assets. Index ETF and Index CFD are both popular and come with their set of cons and pros. Your expectation from your investment will tell you about the one that is more appropriate for you.

The Forex market might not be as volatile as the crypto market, it isn’t particularly stable either. As a result, forex trading is banned in many countries, especially those on the Asian continent. When an instrument is volatile, traders and investors have equal chances of ending up with higher profits or losses as the risk factor is high. If you want to trade currencies, don’t be alarmed as this volatility can be kept under check by adopting various strategies and hedging is one of them. Many traders see hedging as insurance for their trades. You can maintain the good health of your investment by curating efficient hedging strategies. You can do this by investing in an established hedge fund. 

Hedge funds are investment partnerships between a fund manager and investors where the fund managers actively managed alternative investments that may also utilize non-traditional investment strategies or asset classes. Hedge funds are more expensive compared to conventional investment funds and less regulated than mutual funds.

A hedge fund is a pool of investments that allows traders to manage the risk involved with trading. The volume of trades fluctuates and this can be difficult to check but by hedging, you will be able to control it. You can also learn a number of trading strategies that are practiced by hedge funds and incorporate them into your strategies. Let us warn you before you wear your rose-colored glasses; nothing in Forex trading is 100% secure. Hedging is a great strategy. Read more to know how you can use it for the positive.

How Hedge Funds Trade Forex

Hedge funds have proved to be a safe bet when it comes to Forex trading. They keep their investors’ money relatively safe and still manage to generate a hefty return. This might seem odd as we have often seen that risk and profits are directly proportional to each other. 

Hedge funds trade forex in different ways because each hedge fund is different, some are dedicated long-term investments, some short time speculation. However, the majority of hedge fund managers use simple forex strategies without a lot of technical indicators except for price levels and fundamental approach.

This is possible because of the right mix of strategies that hedge funds employ. These funds make sure that they get the best price difference that exists between different currencies. As it is a larger organization as compared to a single trader, they have more manpower to find the inadequacies that exist in the markets and take advantage of that. Trading strategies differ with different hedge funds. Some hedge funds have more open strategies that they evolve according to the current market situations, others are very specific about their course of action. 

Some forex trading strategies that hedge funds use are so simple like the example in Paul Langham video:

Many traders equate hedge funds to mutual funds. Though there are a lot of similarities between the two, the dissimilarities couldn’t be more prominent. Hedge funds require more stringent minimum investments. Their strategies are not set in stone which makes them riskier. Hedge funds are not required to disclose their entire strategies to their clients. This ambiguity can be dangerous.

Hedge Fund Currency Trading Strategies That You Need to Know

Different hedge funds use different types of strategies but there are a few common strategies that make them successful. These are:

Long/Short Strategy: This is a low-risk strategy as it involves lower leverage. You are required to maintain both long and short trading positions simultaneously when you buy currencies that may be undervalued and when you sell the currencies that are considered overvalued. Pledging is an extended part of this strategy.

Market Neutral Strategy: Some hedge funds neutralize the market to reduce the risk. They hold equal long and short positions to do so. This involves lower risk and subsequent lower returns.

Macro-Economic Trends: Many hedge funds use macro-economic trends to create trading strategies. This is a popular strategy. This strategy is based on the fact that the economic condition of a country affects the value of its currency. 

Foreign Currency Options: This option allows you to trade currency at a future date but unlike equity swaps and ETFs, there is no obligation. Short-term trades get protection using this strategy. Some of the strategies are bull spreads, bear spreads, long-term straddle, and long-term strangle.

Momentum Strategies: The hedge fund strategizes using the historical patterns that involve level of support, level of resistance, moving averages, and more. The hedge fund studies the patterns and looks for more scope.

Carry-Style Strategy: The speculators look for a currency that might be depreciating as it entails a lower borrowing cost. They allow the fund to buy higher-yield currencies, like USD and GBP.

Hedge funds use one or more of these strategies at one go. Sometimes, they don’t even use a single strategy from the above list as they have to keep evolving their strategies according to the market condition. For example, one of the most popular carry-style strategies was buying USD that flopped in recent months.

This proves that while hedge funds help in curbing the risk involved in trading Forex, they cannot completely eliminate it. The success of a hedge fund depends on a number of factors like the political and economic condition of a country and government policies. If you do not want to invest in a fund, you can learn these strategies and trade with being associated with a hedge fund.