Hedge funds are investment vehicles that explicitly pursue absolute returns on their underlying investments. The appellation – Absolute Return Fund, would be more accurate, not least as not all hedge funds maintain an explicit hedge on their portfolio of investments. Hedge fund investment strategies vary enormously, many hedge against downturns in the markets, especially important today with volatility and anticipation of corrections in overheated stock markets. The main aim of most hedge funds investments is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions. The main feature that makes hedge fund investment different from other forms of investments is in the fact that the fund can accommodate both short term and long term investment plans at the same time. Short selling, leveraging and arbitrage are a few of the diverse methods that can be utilized in a hedge fund investment. These high-risk manoeuvres are not allowed for mutual fund investors. Hedge funds are designed to invest in equity markets. Equity funds are bought cheap, restructured and then sold. Hedge fund investments receive deferred capital gains.
Hedge funds trade and invest in a variety of markets including currency, securities, and commodities. A hedge fund investment earned its name from safe guarding your investment interest by hedging or dodging market drops.
There are approximately 14 distinct investment strategies used by hedge funds, each offering different degrees of risk and return. For e.g. a macro hedge fund invests in stock and bond markets and other investment opportunities, such as currencies, in hopes of profiting on significant shifts in global interest rates and countries’ economic policies. An investment macro hedge fund is more volatile but potentially faster growing than a distressed-securities hedge fund that buys the equity or debt of companies about to enter or exit financial distress. An equity hedge fund may be global or country specific, hedging against downturns in equity markets by shorting overvalued stocks or stock indexes. A relative value hedge fund takes advantage of price or spread inefficiencies.
It is essential to understand the differences between the various hedge fund strategies because all hedge fund investments are not the same; investment returns, volatility and risk vary enormously among the different hedge fund strategies. The primary aim of investment in most hedge funds is to reduce volatility and risks while attempting to preserve capital and deliver positive returns under all market conditions. In reality, less than 5% of hedge funds are global macro funds.
It is not difficult to invest in hedge funds but it does take a considerable investment of time or advice from a trained and licensed hedge fund consultant to make sure you avoid common pitfalls, mistakes or over-concentration in one type or highly correlated investment portfolio. By choosing a reputable hedge fund investment broker, you gain the advantage of active wealth management that continually changes as the markets change. The freedom to invest in a wide array of options, active management, and successful hedging strategies combined to make hedge fund investments a wise choice for those who want the most out of their financial investments.
Sophisticated investors invest in hedge funds. Most hedge funds will require their investors to be both an accredited investor and a qualified client. An accredited investor is, generally, an investor with a $1,000,000 net worth; an investor’s equity in a primary residence will count towards a $1,000,000 mark. A qualified client is, generally, an investor with a $1,500,000 net worth. Some hedge funds allow investors who are not accredited investors or qualified clients. Generally, these slots are allocated to friends and family of the manager. The investor will be able to find out the investor qualifications through the hedge fund offering documents.
Picking a hedge fund to invest in can be a difficult task. First, an investor should decide why he wants to invest in a hedge fund. Like any investment option an investment in a hedge fund involves a number of different factors including the investor’s short term and long term investment objectives, liquidity needs and risk tolerance. While a hedge fund may have many potential benefits, those benefits should be weighed against any possible drawbacks.
Below are a few ways to know how to invest in hedge funds:
- Make sure you are an accredited investor in hedge funds.
- Learn all you can about hedge funds before investing. Read the blogs, read news articles, skim through papers etc. Speak to friends who personally have worked with hedge funds or have invested in hedge funds in the past.
- Work only with licensed hedge fund consultants and hedge fund brokers who also ensure that you are an accredited investor.
- Include your day-to-day financial advisor through the whole process of investing in Hedge Funds.
- Consult your regular day-to-day financial advisors to help you construct a portfolio of investments that makes sense for your financial position and goals.
- Ask to directly receive monthly or quarterly updates from the hedge fund manager about your hedge fund investments and stay actively involved your self as well.
The Benefits of Investing in Hedge Funds:
- Hedge funds operate in any and every asset class imaginable, from the traditional equities and bonds to currencies, commodities, real estate, and even fine art.
- While most of the strategies used by the hedge fund managers are concentrated in developed countries, there are funds focused on the emerging markets of Asia, Latin America, and Eastern Europe.
- The instruments used by hedge funds are diverse. Hedge funds can utilize futures, swaps and options. This allows them to produce returns that vary wildly from those of broad markets and more common investments.
- Hedge funds exist to make money in any market environment. Investment in hedge funds makes its fees only if it gives you a positive absolute return.
Hedge funds investment has become an increasingly popular form of investment for professional investors who have diversified away from mainstream share and bond investment. It should be noted, however, that hedge fund investment is only one option within an