Many hedge funds have a track record of significantly outperforming the S&P 500 index.

How do they maintain such high returns on a regular basis?

Hedge funds use a variety of strategies to improve their efficiency, including the previously listed leveraged trading. There are, however, several other strategies that may be useful to smaller retail traders. Some of them are mentioned below.

1. Making use of derivatives. Financial derivative contracts such as options, forwards, and futures are often used by hedge funds. Options are a perfect way to reduce such market risks (hedge) against other open positions since they sell at a fraction of the original instrument’s price. Similarly, forwards and futures are often used to bet on the value of specific financial instruments in the future.

2. Trading strategy (long-short). The long-short investing strategy used by traditional hedge funds may also favour retail traders. Short instruments that are in a downtrend and buy those that are in an uptrend. This way, you’ll be able to create a market-neutral portfolio with a high potential return.

3. Build a trade portfolio. When it comes to portfolios, many retail traders are unaware of the value of assembling a set of trades with varying correlations. At any given time, the average retail trader has two or three open trades, or none at all. A skilled hedge fund trader, on the other hand, will attempt to build a portfolio of 12-20 hand-picked trades that reduce market risk through correlation.

4. Don’t use too much leverage in your trades. While many hedge funds use leverage to improve their performance, they are well aware that over-leveraging trades is a surefire path to disaster. Hedge funds don’t use very high leverage.

5. Conduct your investigation. Hedge fund managers don’t make decisions based on their feelings. Each exchange is thoroughly examined and, in some cases, months in advance. Despite the fact that retail traders lack the tools that hedge funds do, they can still exercise patience, learn, and analyse the market whenever they have the time.

6. Keep track of your exit points. Despite the fact that many retail traders have a high winning rate, some are still losing money in the business. Hedge funds limit their losses while allowing their profits to grow. They anticipate when the best time is to exit a trade for the most benefit.