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Hedge funds use has grown exponentially ever since they were introduced to the investing population. Before you hop in and invest in hedge funds, here are some key insights that you need to know.
Key Characteristics of Hedge Funds
Hedge funds are open only to accredited or qualified investors.
If you want to invest in hedge funds, you are required to meet certain requirements. In general, investors should have a net worth in excess of $1 million (minus their primary residence) or an annual income that has exceeded $200,000 for the past two years.
Hedge funds have wider investment latitude
A hedge fund’s investment universe is only restricted to its mandate. A hedge can basically invest in anything, including land, real estate, currencies, alternative assets, and derivatives. Compare that to mutual funds, which only invest in stocks or bonds.
Hedge funds use high leverage.
Hedge funds will typically use leverage, which is basically borrowed money, to increase their returns and this can possibly expose them to a much wider range of investment risks. This was demonstrated during the Great Recession of 2007 to 2009. In the subprime meltdown that was the beginning of the recession, hedge funds were especially hard hit because of an increased exposure to collateralized debt obligations and high levels of leverage.
Fee Structure
Rather than charging an expense ratio only, hedge funds charge both an expense ratio and a performance fee. The common fee structure is known as “two and twenty,” which indicates a 2 percent management fee and then a 20 percent cut of any gains generated.
Types of Hedge Funds
Hedge funds can go after different degrees of strategies that include macro, equity, distressed securities, activism, and relative.
A macro hedge fund invests in stocks, bonds, and currencies with the hopes of profiting from changes in macroeconomic factors like global interest rates and countries’ economic policies.
An equity hedge fund may be worldwide or country-specific. They invest in appealing stocks while hedging against downturns in the equity markets by shorting undervalued stocks or indexes.
A relative value hedge fund takes advantage of price or spread inefficiencies.
Other hedge fund strategies, among others, are aggressive growth, income, emerging markets, value, and short selling.
Another popular strategy is called the funds of funds approach, wherein a hedge fund combines and matches other hedge funds and other pooled investment vehicles. This blending of different strategies and asset classes is aimed toward providing a more stable long term investment returns than those of any of the individual funds. Returns, risk, and volatility can controlled by the combination of underlying strategies and funds.
Regulations for Hedge Funds
Hedge funds generally face little regulations from the Securities and Exchange Commission, particularly when compared to mutual funds, pension funds, and other investment vehicles.
The reason behind that is because hedge funds mainly accept only those “qualified” or accredited investors, who are high-net-worth individuals who meet the net worth requirements. Even though some funds operate with non-accredited investors, US securities laws require that at least a plurality of hedge fund participants are qualified. You can get Wibest Broker News about Wibest Top Brokers here
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