Hedge Funds - Elite Investment Or For Everyone?

A hedge fund is a kind of investment fund that is open to only a limited number of investors. It is a sort of private investment partnership that requires an initial minimum investment. Like mutual funds, these funds too collect money from the investors and utilizes the same to invest in bonds and stocks. The main difference between the two is that hedge funds normally take long and short positions in assets so as to lower portfolio risk.

Accredited Investors

Hedge funds are open to accredited investors only in the U.S. and due to this, they are exempted from any regulation by any of the regulatory bodies. These funds invest on the behalf of wealthy institutions and individuals. The motive is to generate returns which are not closely related to those of broader financial markets. The investors are expected to earn a minimum annual income and enjoy a net worth in excess of one million dollars. These funds are not open to general public. The investors have to keep the money in the fund for at least a year.

Aggressive Investing Goals

Hedge funds are used by financially strong institutions as well as individuals. The strategies that are not available to mutual funds, especially the aggressive ones, can be used by hedge funds. This means that these funds are allowed to use selling short, swaps, program trading, leverage, arbitrage and other derivatives. These funds are able to accomplish many investing goals that are aggressive because they have been exempted from many rules and regulations that are generally govern other mutual funds.

Limited Investors

Per fund only hundred investors are allowed by the law. Hence, most hedge funds have high minimum investment figures that range from $250,000 to $1 million. However, similar to the mutual funds, here also the investors have to pay some amount of money as the management fee. Besides this, hedge funds also take usually 20% of the total profit.

Hedge Investments

The very term hedge funds is used to differentiate their funds from other regulated retail investment funds such as pension funds or mutual funds. However, it does not necessarily mean that the funds literally hedge their investments against adverse market moves. These funds are flexible enough to enter in to swaps, futures and other derivative contracts and they can also follow complex strategies.

Low Risk Factors

Hedge funds have been crafted so as to reduce the risk factor. It is basically developed so that a higher return on investment can be made. This is done by taking advantages of the market volatility. However, it has been observed that hedge funds can be riskier than the entire market due to the speculative strategies that are used.

With hedge funds emerging as potential avenues for profit generation and complex strategies, check what strategy suits your financial requirements and decide accordingly.