What is a Hedge Fund?

Hedge funds offer the wealthy an aggressive

investment vehicle that can lead to big profits or

loses. Heres a closer look at what is a hedge fund.

There are trillions of dollars invested in nearly 10,000 hedge funds worldwide, yet these investments

remain a mystery to many consumers. Possibly because minimum investment requirements keep hedge

funds off limits to the average investor. Read on to learn more about these investment vehicles typically

used by the wealthy to generate more wealth.

What Are Hedge Funds?

A hedge fund is a type of investment fund that uses a variety of investment strategies to maximize return.

A hedge fund is similar to a mutual fund in that several investors pool their money together, however,

hedge funds arent subject to the same government regulations as mutual funds. Since they are largely

unregulated, hedge funds can use investment strategies that arent available with mutual funds, e.g. short

selling, program trading, arbitrage. and program trading.

While hedge funds have a reputation for being risky, theyre a less restrictive investment vehicle than a

mutual fund because they can invest in more than just stocks and bonds. Hedge funds can invest in just

about anything that can be bought or sold. The investment also isnt as transparent as a mutual fund

investors arent necessarily privy to where the moneys being invested or the strategies that are used.

Its common for a hedge fund to earn upwards of 10% every year. In fact, hedge fund managers promise

a certain return each year. With hedge fund investing, theres also the potential for devastating losses.

Some people have lost millions of dollars from hedge fund busts.

Hedge funds are limited to accredited investors and are

commonly offered via private placement. That is, investors

who have a large amount of money to invest, have a high

net worth, and are very knowledgeable about various

investment strategies. Generally, you can invest in a

hedge fund if you have a $1 million net worth and

$200,000 annual income for the past two years

($300,000 joint income). Hedge fund managers are

allowed to let in a few investors who dont have the

income qualifications, but these people are typically

close friends or family. Hedge fund managers choose

who they want to let in and they can reject you even if you

meet the qualifications.

If you want to invest in a hedge fund, youll need a lot of money. Hedge funds have a high minimum

investment amount, e.g. $500,000 or even several million dollars. Hedge fund managers set their own

minimum investment amount requirements based on how they want to limit entry to the fund.

Like other investments, hedge funds come with fees fees that make hedge fund managers very rich if

the fund is profitable. Hedge fund managers are some of the wealthiest people in the world earning

billions of dollars each year. Theres no limit on the fees hedge funds can charge. You can expect to pay

an annual management fee of about 1% to 2% and a performance fee, 10% to 30% of your earnings, in

addition to upfront charges to join the hedge fund. Hedge funds may also have a minimum investment

period which makes them an illiquid investment. You cant withdraw your money from a hedge fund at any

time.

Because hedge funds arent regulated, theyre often a risky investment. Its up to investors to make sure

theyre choosing a good fund from a fund manager who wont take their funds. One of the ways to confirm

you have a good fund is to choose one thats audited by a reputable auditor like Ernst & Young, Deloitte

& Touche, or PricewaterhouseCoopers and thats represented by a recognized law firm.

Hedge fund managers arent allowed to advertise their funds, not even on the internet. So, odds are that

you wont even hear about a hedge fund or be invited to invest unless you have a lot of money or you

know the funds management.

If youre interested in a hedge fund but dont have as much money as the fund requires and want to

hedge against some of the risk, you can invest in a fund of hedge funds, an investment vehicle thats

essentially made up of several hedge funds. Always seek guidance from a trusted source when it comes

to high risk investing, such as hedge funds.