They are usually structured as partnerships with the general partner being the portfolio manager, making the investment decisions and the limited partners as the investors. These funds are subject to the same market rules and regulations as any trader. They use advanced investment strategies such as leverage, long, short and derivative positions in both international and domestic markets with the aim to generate high returns.
Hedge funds are expected to offer profit potential in both rising and falling markets.
They are usually less highly regulated than traditional funds.
Prior to investing in this type of fund, it is vital to have a basic understanding of the characteristics of the different Hedge fund strategies. Our site, Wealth Capfund provides you all possible strategies for a safe investment.
1. Long/short or Hedged Equity Strategies: This is considered to be the largest category of hedge funds in terms of numbers.
2. Relative value strategy: These funds are often considered as market neutral since there is little or no market related element to their returns.
3. Event Driven Strategy: It seeks to anticipate and profit from price movements that arise from specific corporate events, such as take over and mergers.
4. Tactical Trading Strategy: These are the highest risk of all hedge funds as a sector.
These strategies are not as easily accessible. Most often, hedge funds are set up as private investment partnerships legally that are open to a limited number of investors and need a very large initial minimum investment. Investments made in hedge funds are illiquid since they require investors to keep their money in the fund for a minimum period of at least one year. Unlike mutual funds, hedge funds are unregulated since they cater to sophisticated investors.
Investors should note that hedging is basically the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return of investment. Use of different strategies avoids hedging risks.
Hence it is evident that with better returns and risk, hedge funds are superior to mutual funds and there are increasing amount of evidence that shows the benefits of considering hedge funds as an asset class at the strategic asset allocation level.
Hence investors should understand that the hedge fund promise of pursuing absolute returns means hedge funds are liberated with respect to registration, investment positions, fee structure and liquidity. Liquidity is the main concern for investors. So go ahead and invest for good returns.
For more details please visit www.wealthcapfund.com
Invest In Hedge Funds
The recent blowup of the Bayou hedge fund has again brought the dark side of hedge fund investing into the forefront. As an advisor, I love the ability of hedge funds to deliver absolute returns regardless of market direction but I worry about giving client's money to someone and then trusting that it will not be mis-appropriated or lost in aggressive investment strategies. I believe a better way to get the benefits of hedge funds without some of the drawbacks is to invest in mutual funds that follow hedge fund like strategies.
Hedge funds can be a viable part of any investment strategy. For the most part, they seek to generate absolute returns regardless of market direction and they tend to be non-correlated with traditional stocks and bonds. The downsides are that you have to be an accredited investor to invest in them (earn $200,000 a year or have $1 million in assets), they are illiquid, there is little, if any , disclosure on the underlying investments, and fees can be steep with most funds charging a management fee plus a percentage of profits.
Hedge fund of funds are another popular investment alternative. With these funds a manager is hired to create a diversified portfolio of hedge funds. Investors still have to be accredited and there are still some of the drawbacks to hedge fund investing.
Until recently there were no real alternatives for non-accredited investors or people who didn't like some of the hedge fund drawbacks. In 1997 the short rule, which made it very difficult for mutual funds to sell stocks short, was repealed. Then the market collapsed in 2000, leaving investors looking for mutual funds that could beat zero instead of beating the market. Since then a confluence of mutual funds have been introduced that follow hedge fund strategies: Long/Short, Merger Arbitrage, Commodity, Tactical & Strategic Asset Allocation, Hedged Equity, Global Macroeconomic, Market Neutral, etc.
Unlike private hedge funds, mutual funds publish their holdings on a regular basis, have daily liquidity, cannot charge performance fees, don't have nearly the same potential for fraud, and cannot use unlimited leverage. The disadvantages of using mutual funds are that there are currently a limited number of options, many of which are closed to new investors, a lack of a long term track record for many, and many of the best and brightest managers only operate private hedge funds.
I believe that for many investors mutual funds that follow hedge fund strategies are a better alternative than hedge funds or hedge fund of funds. Added to a traditional portfolio they can provide absolute return and diversification benefits. Investors can also use them to create their own fund of funds and create portfolios that have shown good performance with low risk in the past.
Both Mark Plummer & Matthew Tuttle are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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