I will use this medium post to hopefully explain what Hedge Funds are and why they are great for your investment portfolio - illustrating the risks and rewards.

Firstly, what are hedge funds?

Hedge funds are defined as actively managed investment vehicles, usually restricted to institutional investors (i.e. high net worth individuals & a minimum investment of $1 million) due to the greater amount of associated risk.

An actively managed fund means they want to out-perform the underlying index, for example, out-perform bitcoin. Whereas a passively managed fund, just follows the underlying index, for example, the fund just tracks the top 20 crypto investments.

Hedge funds get their name from the practice of ‘hedging’ the associated risks of positions held within the fund. What this means is that they may bet on the rise and fall of stock or tokens, essentially gaining on both price movements, thus negating any risk.

To put it in crypto terms - let’s say for example token XYZ is rumored to release a working Mainnet for cat-coins. Token ABC was delayed with their Mainnet and may not release their Mainnet if XYZ is successful. Knowing this information, the hedge fund will go long, or buy, XYZ because of this rumour while at the same time short, or sell, token ABC.

In the above scenario, the hedge fund will make money on both the rise of XYZ and fall ABC tokens. These sort of positions are very risky and such trades are not always available to personal investors.

Secondly, why is an active fund better?

Actively managed funds need to out-perform the market to get paid. The fee structure is usually quoted as 2/20. This means that the performance of the fund needs to beat a set benchmark to receive any performance fees. For example, the benchmark could be 10% more than the return on bitcoin, and therefore the fund manager will not be paid unless he out-performs. Furthermore, high watermarks are usually set to ensure that when bitcoin has negative returns, the fund still needs to reach a minimum return of 10% to get paid.

So therefore, hedge funds need to make money in both bull and bear markets, else they will not get paid. This is essentially why you pay the performance fee, you want to beat the market.

The performance fee for Apex is only 15%, where tokens are set aside to cover the performance fees of the underlying funds. More information can be found on their site — https://www.apextokenfund.com/fees

How else do hedge funds trade?

Hedge funds trade different strategies, the above bet is called a “long-short” or “event-driven”, others methods include arbitrage, where managers look for mispriced tokens on various exchanges. Most investors do not have various tokens spread across multiple exchanges, and buy the time the mispricing is noticed transferring tokens from one exchange to another is too costly to make any money. Funds also trade leveraged positions.

Another advantage of hedge funds is being able to invest in private presale ICO’s. These presales are usually heavily discounted, and carry a lot risk, with an exponential reward.

Can’t I just hold bitcoin?

Yes, you could, but if you don’t sell at the peak of the market, your just hodl’ing. How about those times when you jump out of a coin, and within hours it moons. Sometimes it’s like the market knows and is against you. — Leave it to the experts, the market makers not market takers.

Do you have any proof of out-performance?

Due to fewer regulations, hedge funds are not required to publish returns to non-investors, and therefore, finding information online can be difficult. I will provide you will some tidbits to help you with your research.

An average of multiple hedge funds performance per index -

Compare this to the performance of bitcoin -