The Forex market might not be as volatile as the crypto market; it isn’t particularly stable. 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, which can be not easy to check, but you will control it by hedging. You can also learn several trading strategies 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, most hedge fund managers use simple forex strategies without 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 than a single trader, they have more workforce to find the markets’ inadequacies and take advantage of that. Trading strategies differ with different hedge funds. Some hedge funds have more open strategies to evolve according to the current market situations; others are particular about their course of action.
Some forex trading strategies that hedge funds use are so simple, as 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 a few common strategies make them successful. These are:
Long/Short Strategy: This is a low-risk strategy as it involves lower leverage. You must simultaneously maintain both long and short trading positions when you buy currencies that may be undervalued and sell the currencies 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 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 a 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 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 curb the risk of trading Forex, they cannot eliminate it. A hedge fund’s success depends on several factors like a country’s political and economic condition and government policies. If you do not want to invest in a fund, you can learn these strategies and trade with a hedge fund.