How to Manage a Hedge Fund
You've probably heard of hedge funds, but have little to no idea what they are. Welcome to the club. Most people mistakenly believe hedge funds are the same as mutual funds. In fact, there are significant differences between the two. It is important to understand exactly what a hedge fund is and how it operates, especially if you are considering investing in one.
- Difficulty:
- Challenging
Instructions
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Understanding a Hedge Fund
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1
Learn about hedge funds. Hedge funds deal entirely with private investments. Unlike mutual funds, hedge funds are not regulated by the Securities and Exchange Commission (SEC) or any other regulating body.
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2
Decide whether you have enough money. In order to invest in a hedge fund, you must have a great deal of capital. The average minimum investment in a hedge fund as of 2006 was $1 million.
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3
Determine how many shares are left in a potential fund. Only 499 investors can purchase shares in a hedge fund at any given time. These investors are known as "limited partners."
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4
Find out whether you're eligible to invest. The purchase of hedge fund shares is limited to accredited investors. To be an accredited investor, you must have a net worth of over $1 million or an income in excess of $200,000 each year.
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5
Consider the miscellaneous fees. There are no limits on the fees that hedge funds can charge. Due to this, most hedge funds charge much higher fees than mutual funds. In fact, don't be surprised to see clauses requiring 20 percent of the profit you make. A portion of these fees helps manage the fund, but not all.
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Look at your short-term goals. Do you need your money right away? You may find it difficult to manage your fund. Selling shares in a hedge fund can be nearly impossible. It is not uncommon to find hedge funds that allow redemptions only quarterly, or even annually.
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Examine the whole picture. Hedge funds rely on strategies to manage funds during market downturns. However, while some hedge funds are able to perform quite well during rough times, it is unlikely that most hedge funds would beat a market index.
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Tips & Warnings
If you're thinking about investing in a hedge fund, proceed with extreme caution. Hedge funds are considered highly risky due to the lack of information about them. In addition, the lack of regulation, high fees and poor redemption policies make hedge funds one of the biggest investment gambles.
