To keep the portfolio liquid and ready to trade when needed, the hedge fund manager has to look for options that allow him to buy more or less than what he needs at a fixed price. He has to balance the costs of the investment against the gains. If the investment appears to be high risk then this may lead to the loss of capital.
In a complicated portfolio, the investment manager will need to know how much he is willing to pay for each asset in terms of its price. By paying less than the market value of an asset he will lose money and earn nothing.
While assessing the suitability of a security for the hedge fund manager, the manager will also require to know if it has a negative yield. The rate of interest may appear high but if it is lower than the yield of long-term treasury bills, the real estate will be a bad choice. This is because it has no liquidity and can only hold the same value for a very short period of time.
So, when performing the Investment Management a hedge fund manager has to take into account all the above aspects. It is not necessary that the hedge fund manager must act on every deal as he is trading on a short-term basis only.
Stock Selection: A good investment manager does not buy a stock which has the lowest dividend yield but one which has the highest growth rate. He should focus on the one that yields the highest yield. This may require a great knowledge of the financial reports and the selection process for a particular stock.
Only select companies which are likely to grow in the future and which has the potential to generate the capital required for investing in the growth of the company. However in the meantime, it has to be ensured that these companies have good cash flow that is sufficient to pay the dividend when required.
For the understanding of the different types of stocks available research is required by the investment manager. The stock quotes provided by the stock brokers must be able to give an accurate picture of the type of the stocks available for selection. Once the exact type of stocks is identified, the managers have to examine the share prices of these stocks and then estimate the amount of profits expected from the investment.
Stock Analysis: Also known as a stock picker, the Stock Analysis helps in increasing the funds in the portfolio and is also helpful in making short and long term investment decisions. For a systematic approach to Stock Analysis, the investment manager has to keep the whole process under control. The analysis helps in determining the possible change in the stock prices and how it is possible to make a profit in this regard.
The Stock Analysis helps in taking decision on the proposed investment and in selecting the company that best suits the requirement of the investment manager. The stock analysis provides the details regarding the historical performance of the stock prices and helps the investment manager in forecasting the future performance of the company.
Stock analysis helps in generating a risk premium which is paid to the management and has to be funded in the transaction. The selection of the stocks, which have the least amount of risk are rewarded with greater risk premiums and the ones with the highest risk are the ones which have to be carefully selected.
Trading the Wrong way: In any Asset Management approach the trader should remain disciplined in the approach of his trading and should follow a structured approach. The hedging strategy should also be examined and the factors such as the balance sheet, cash flow and net worth should be evaluated before selecting the equity positions. The overall market trend should also be considered so that the trader can know the appropriate time to make a trade.