How to Pick a Hedge Fund

The past few years have seen a remarkable rise in the popularity of hedge funds. These somewhat exclusive investment funds are generally risk adverse and peg the investor's commission to performance, making the likelihood greater that you'll earn money. If you want to get into a good hedge fund, follow these steps to pick the right one.

Instructions

1. Understand what a hedge fund is. While the term has become a financial buzz-word over the past few years, few people understand how the fund works and what risks and requirements are involved. Read blogs like the Hedge Fund Blog or speak with a reputable brokerage about the fund's specifics.

2. Consider minimum investments. Because a hedge fund almost always requires investment by an accredited investor, brokers who invest in or control hedge funds frequently require a minimum investment from you. Look at different funds to learn the range of minimum investments to see which funds you qualify for.

3. Know the fees. Hedge funds use a fee structure that is significantly more complex than a simple stock sale transaction. There are performance and management fees, both of which vary. 20% of earnings is a standard performance fee, but some top hedge fund managers are known to take up to 50%. Understand all the fees involved in any hedge fund before you pick one.

4. Get the financial background. One of the most important factors to look at when picking a hedge fund is the fund's financial history. Look to see if the fun has consistently made money over the years and at what rate. To get an idea of how well a fund has done, compare it to one of the many hedge fund indices, such as those run by Goldman Sachs and Merrill Lynch.