Tina: Good for you. Do you know what “hedge” means?
Tom: I know “hedge” means to manage or reduce risk, but I am not sure what a hedge fund is.
Tina: A hedge fund is an investment fund that utilizes a broad range of investments. It uses advanced investment strategies to reduce risk.
Tom: What are advanced investment strategies?
Tina: There are many advanced strategies to invest one’s assets. For example, an investor can use leverage, long or short selling, and derivative positions in both domestic and international markets.
Tom: Is diversification the basic investment strategy of a hedge fund?
Tina: Yes. Have you heard the proverb “don’t put all your eggs in one basket?” Diversification is the key. A successful investor can use “leverage” and “short selling” to hedge against the downside risk of a stock market.
Tom: How does “leverage” work?
Tina: Leverage, also known as gearing or levering, is a general term for any technique to multiply gains and losses. In finance, leverage refers to the use of debt capital to supplement equity capital.
Tom: How about “short selling?”
Tina: Short selling is the selling of a security that isn’t owned by the seller but that is promised to be delivered.
Tom: What? That’s so confusing!
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