What Are Hedge Funds and Why Should You Consider Hedge Fund Investing?

When most people think of their investing options, they think “stocks” and “bonds”. This is largely due to accessibility. Stocks and bonds are readily available for retail investors, have clear risk profiles, and do not require a large, upfront investment.

But there are also alternative investment strategies that many don’t consider. Hedge funds, for instance, may seem completely out of reach for most investors, even if they are interested in joining one.

There are a lot of misconceptions about the nature of hedge funds, the amount of risk associated with investing in them, and the ability for everyday investors to access them.

Let’s take a deeper dive into hedge funds and dispel some of the myths.

What is hedge fund investing?

In short, hedge funds are pooled investments, helmed by a hedge fund manager with a unique investment strategy or methodology.

The pool can be made up of businesses or individuals. Often times, entrance comes with a high price tag.

The hedge fund manager decides where to allocate the money. Their interests are aligned with the investors, as their fee structure is based on success. “Two and twenty” is a common fee structure, where they receive two percent of the assets as a managing fee and twenty percent of any gains they produce.

 

 

What is the appeal of hedge funds?

You may have noticed that hedge fund managers have a large upside compared to financial advisors. This is due to the unique nature of hedge funds. Unlike a typical financial manager who often plays a tried-and-true portfolio allocation of stocks and bonds for their clients, hedge funds have complete freedom in their investment strategy. As such, they go after substantial, market-beating returns.

To do this, they study different markets and predict trends. Then they invest where they see value. Sometimes, that means they invest in something traditional, like the burgeoning Colorado real estate sector. It can also be extremely specific or obscure, like following Taiwanese semiconductors or purchasing Australian water rights. Some even base their decisions on satellite images of parking lots from space.

Whatever the case, there is significant risk and significant reward to be had. LCH Investments, for instance, made over $23 billion for their investors in 2018. Others dropped to zero, losing all of their investors’ money.

 

Who can invest in hedge funds?

Investing in a hedge fund is more difficult than other forms of investing, because it typically requires that everyone involved qualify for their positions.

The investors usually have to be qualified purchasers, which means they are people or companies that satisfy certain financial qualities, like income or net worth thresholds. For example, a person must have $5MM plus investable assets to qualify for most hedge funds. Some smaller hedge funds do allow accredited investors to get involved.

But this only paints part of the picture, because hedge funds can charge whatever minimum they desire. That can start at $5MM and can easily go up to $10MM or more. So even if you are an accredited investor, some hedge funds may be out of reach.

But hedge funds might be more accessible than you once thought.

 

 

How you can invest in a hedge fund

While it’s true that a direct investment in a hedge fund means meeting their set requirement, there are other ways to get in.

Some companies, like HUDSONPOINT Capital, have the relationships that make it possible for people to enter into a hedge fund without meeting the minimum financial requirements.

They do this by splitting the entrance fee, which can be up to $10MM, amongst a group of people, and invest it on their behalf. Think of it as a pooled investment into a pooled investment.  This way, they can buy into the fund without having to be super accredited investors themselves. Likewise, they may not carry as much risk as if they were to invest on their own.

 

Should you invest in a hedge fund?

Hedge funds can be high-risk investments, but they also carry a high potential upside. In addition to not being a regulated 1940 Act fund. It’s best to exercise caution and do substantial due diligence before deciding to invest.

Find out which one aligns with what you want out of an investment, and you can consult a Registered Representative, who can help you decide if a hedge fund investment is right for you.

The point of investing is to have your money grow on its own, and if you are able to take the risk, a hedge fund may give you the rewards you’re looking for.

 

 

Please note that any investment involves risk including loss of principal. Some risks of investing directly or indirectly in real estate include declining real estate values, changing economic conditions and increasing interest rates.

This is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation of any products or services. Opinions are subject to change with market conditions. The views and strategies may not be suitable for all investors and are not intended to be relied on for legal or tax advice.

Securities offered through National Securities Corporation Member FINRA/SIPC