Hedge fund Forex strategy: How do they work?

Volatility is an element of the market that, if not mitigated, can cause large losses to investors. Specifically speaking of Forex, it is one of the markets with the greatest fluctuation, due to the high volume of daily operations and the high number of speculators that are concentrated to operate.

The aggressive changes that take place in the Forex market are very difficult for investors to calculate, to the extent that more people are losing money. While there is no fool-proof formula in this market, there are strategies that can help you mitigate the risks.

In this article we will address one of these strategies, more specifically the “Hedge Fund Forex strategy“.

Forex Hedge Funds are a hedging tool intended primarily for more conservative investors seeking to secure their profits in the event of a turnaround in the market.

If you want to learn more about it, we invite you to continue reading until the end so that you can include this strategy in your Forex trading tools.

What will you learn in this article?

  1. What is a Forex Hedge Fund and what does it consist of?
  2. Hedge Fund Forex Strategies
  3. The benefits of using a Forex Hedge Fund
  4. Finally, we close by explaining one way in which you can benefit from Hedge Fund Forex.

What is a Hedge Fund and How does it work?

A Forex Hedge Fund is a protection strategy that is used by investors against the fluctuations of the forex market, compensating totally or partially the negative impact on their operations. In addition, it seeks to reduce losses in the short term with the intention of maximizing profitability in the long term.

The strategy works by buying the opposite of correlated pairs or what is the same, opening a currency pair in buy and another currency pair in sell position.

How do you protect yourself?

This happens when you buy a long position (buy) and decide to open another short position (sell), reducing the possibility of a total loss that could be generated by a single operation that touches your stop loss.

For example: suppose you open a buy or long position on the EUR/USD pair because you consider it has elements to make its price go up. But as a protection measure you open another short or sell trade of the same EUR/USD with the intention of protecting yourself if your initial assumption is not correct.

Also, if you are looking to diversify this strategy with more elements, you can do it with two currency pairs of similar behaviour, but different currencies. For example, in a new trade you have decided to go long on the EUR/USD and in short you open the GBP/USD trade countering even more the volatility of trading an identical pair.

It is important to note that when two positions are opened simultaneously, the broker will charge you higher commissions, causing a decrease in your profits, but greater results due to the protection strategy, Hedge Fund Forex.

In the following section we will know the main strategies of Hedge Fund Forex that you can use to reduce the risks of your trading and add it to your investment portfolio.

Hedge Strategies in Forex

Equity; long/short

The aim of this strategy is to buy currencies that you consider to be undervalued in the hope that they will rise in price. On the contrary, you sell those overvalued currencies that you think may fall even more.

Neutral market

Maintaining an equal number of long and short positions, reducing the risk of market fluctuations.

Momentum Strategies

Using historical patterns of support levels, resistance levels and moving averages, among others.

Foreign Currency Pairs

Offering foreign exchange trading at a future date without the obligation to sell it as in the case of ETF’s or stocks.

Just short

After performing the relevant analysis, you sell the pairs you consider will follow the trend in short and could decrease their value over time.

Macroeconomic Trends

Focusing on economic and monetary policy issues, measuring the impact these changes may have on the value of currencies, interest rates, commodities or indices.

What are the benefits of Hedge Fund Forex Strategy?

  • You can generate positive returns regardless of whether the market is up or down.
  • By including these strategies in a well-diversified portfolio, you reduce risk and volatility, increasing the possibility of higher returns.
  • Combining the strategy with your investment objectives creates a “shield” that can help your investments.
  • By using them over the long term, you can reduce the fees charged by brokers for exiting and entering the market.
  • Through them, you can achieve a great diversification that other tools do not have the capacity to offer.

What are the steps to make the most of Hedge Fund Forex Strategy?

  1. Analyse your investment portfolio and your objectives. Based on that analysis, you decide if it is a good option for your finances to use a Forex Hedge Fund.
  2. If you decide to implement this strategy, the next step will be to investigate the white label brokers that offer this service, asking for commissions and the minimum investment amount.
  3. Once you have selected the strategy and the broker, it is time to open your first order and, once applied, you open the trade against it.
  4. Depending on the time, you have to wait for the result of the market movement and implement the strategy according to the parameters previously established.

One of the results that can be considered part of the strategy would be a winner and a loser. If the gain is greater than the loss, excellent. If the loss is greater than the gain, it would be expected that it would not be so high. You can even end up in break-even (no losses or gains). Any of these results could be considered a good strategy because the loss was mitigated or the profit was obtained.

Hedge Fund Forex Strategy: Why should you use it?

Forex Hedge Funds are a good alternative protection against Forex market volatility. They don’t typically provide the highest returns, but they do minimize losses, aiming for long term winning consistency.

To create a well-diversified portfolio, you have at your disposal strategies with a Hedge Fund approach that you can combine with other assets to achieve a balance. The objective is to support the market fluctuations, looking for a minimum affectation to your money.

The benefits of this strategy are unique because no matter if the market goes up or down, you can obtain profits. By combining your investment objectives and your portfolios with this strategy, you will be taking another step towards the desired profitability in the financial markets.

Do you want to start your journey in Forex? At Smart Brokers Solutions we will be happy to help you!

Rodrigo Insua

Avatar of Rodrigo Insua

Head of Marketing en Smartbrokersolutions. Coordination and management of online and offline marketing campaigns.

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