Do you feel that hedge funds sound just too mysterious and risky? They can also be exciting, since they do offer a chance at high returns. Let’s take a look at what a hedge fund really is and cover the qualifications required to invest in them. Further knowledge about these funds can help you decide if they may be an advantageous investment for you or not.
What Are Hedge Funds?
Hedge funds refer to a type of private, unregistered investment pool that utilizes sophisticated hedging and arbitrage techniques to trade in the financial markets. Not all hedge funds use hedging techniques, though. The term hedge fund really refers to the “private” and “unregistered” status.
Hedge funds are not unlike mutual funds in that they pool the investors’ money and invest it collectively. The differences are significant, though.
What Kinds of Investments Do Hedge Funds Engage In?
Hedge funds are essentially unrestricted in the types of investments they can make. They can engage in arbitrage, take short positions on stocks, invest in different types of derivatives, gold, silver, and more, and can leverage to the hilt.
Essentially, they are unlimited in the amount of risk they can assume. They don’t have the types of limitations on them that are imposed upon a typical mutual fund.
That’s not to say that all hedge funds are extremely risky. Some are, but many are relatively conservative. As with regular mutual funds, there’s a wide variety available.
Given the lack of restrictions, hedge funds have more opportunity to make a lot of money; an annual return of 100% is not unheard of. Many will average 35+% over a reasonable period of time. But those types of returns don’t come without risk and the risk can be considerable.
How Can You Invest In Hedge Funds?
A hedge fund isn’t open to the general public; there’s no place you can simply go and buy shares in a hedge fund. They aren’t allowed to raise money or sell shares publicly. It’s similar to a private club where they use a screening process to decide who to “let in” and you have to prove your worth.
Hedge funds are extremely expensive. Usually, the managers take a substantially larger cut than with other investments, regardless of how profitable the fund is in any given year.
So who can invest in hedge funds? If you’re both wealthy and not risk-adverse, they may be a good option for you. Many funds require a minimum of a $5 million investment, and some require much more than that.
Also, they will likely give you a lengthy questionnaire to fill out to determine if you’re financially sophisticated enough for such high-risk investments. If you meet these requirements, you don’t have to do much other than complete the questionnaire and write a check.
Hedge funds are not for those with a weak stomach and the risks can be considerable. However, the possibility exists to make a lot of money in a short amount of time. This is particularly true for the hedge fund managers.
If you’re qualified to invest in hedge funds, seek out additional information. Your financial advisor can point you in the right direction.