You’ve probably heard of hedge funds on financial news channels, websites, or blogs. What’s attention-grabbing about them is oftentimes they are tied with large sums of money. For instance, you might have heard about XYZ hedge fund managing $2 billion in assets or a similar headline like that. But what exactly is a hedge fund? This article will serve as a crash course to this relatively nascent type of investment organization.
What is It?
At its core, a hedge fund pertains to a group of investors that specialize in high-risk strategies, like investing with high leverage, in the hopes of making substantial profits over time. It serves as an alternative financial instrument for those who wish to partake in high-stakes investing but does not have the in-depth knowledge or time to actually buy and sell assets. Keep in mind, however, that most hedge funds are only accessible to high net worth individuals and large institutions. The birth of hedge funds started in the 1940s, thanks to a man named Alfred Winslow Jones who wanted to trade both the falling and rising prices of assets. He set up the investment structure and charged a fee to his investors.
How it Works
Each hedge fund is built to capitalize on specific discernible market opportunities. One fund may focus on commodities in the Pacific region while another one may take advantage of mispricings in European index funds. They use a plethora of investment strategies and thus are often categorized based on their investing approach. This allows investors to choose which fund to entrust their cash in based on risk appetite.
Key Traits to Remember
Perhaps the most notable trait is that hedge funds are only accessible to a select type of investor. As said earlier, you’ll need a minimum amount of money or net worth to be able to qualify as a hedge fund investor. And even if funds would want to take anyone’s money, regardless of their net worth, they are bound by law to only accept those with a yearly income over $200,000 or a net worth of more than $1 million. Another key trait is that hedge funds, compared to mutual funds, can offer a broader selection of investable assets, such as real estate, stocks, derivatives, currencies, etc.
Now that you’ve learnt how a hedge fund operates, it’s time to choose and shop for a hedge fund that can grow your money. There are several factors to consider when comparing hedge funds, one of which is the fee structure. The fee structure that most hedge funds use is a two percent upfront management fee and a 20 percent performance fee on any profits produced.