If there’s an apple of the eye of investors, it’s the hedge fund. This is an alternative investment vehicle to discriminating investors looking for diversity in their investment portfolios. This sophisticated class of investors relies on the exceptional talent of hedge fund managers to grow their funds and deliver the desired returns.
Hedge fund definition
Let us expound on the definition of a hedge fund to better understand why many investors are drawn to the product.
A hedge fund is similar to mutual funds because it’s also a pool of underlying securities in the investment portfolio. Investors can select from several types of investment options.
Institutional investors, pension fund managers, and high-net-worth individuals gravitate to hedge funds because of its unique features. The hedge fund manager manages a specialized portfolio that carries a balanced risk and reward opportunities.
Investors also have the option to go short-term or long-term depending on their risk appetite. But the real dynamic of a well-managed hedge fund is the consistent delivery of positive results (profits) regardless of market conditions.
The hedge fund has yet to be regulated but U.S. laws mandate that investors to the fund should be accredited. Accreditation is confined mostly to institutions or individuals with vast financial resources. A significant knowledge of the investment landscape is also a must.
When it comes to investment possibilities, investors can pick from among the traditional securities like bonds, commodities, stocks, and real estate. But the main selling point is aptitude or flair of the hedge fund manager to formulate strategies and apply sophisticated techniques.
Hence, investors don’t mind paying for fees and sharing some bounty derived from a well-performing hedge fund.
Unlike mutual funds where an investor can sell shares to bring liquidity, hedge funds have a “lockup” or predetermined period within which an investor can withdraw the funds for liquidity purposes.
Hedge fund managers follow a certain timeline so the pulling out of funds is not allowed as it will disrupt the overall investment strategy. But In the end, the projected returns are realized.
Some important points on hedge funds
Pending formal regulation, hedge funds will remain an attractive investment alternative. Investors feel more secure investing in the fund because there’s less worry about market volatility. All investment propositions go through a meticulous and systematic analysis.
Aside from the due diligence performed, the hedge fund manager has already taken into account the overall risk/return objectives. Risks have been identified and mitigated. Investors will also find comfort that every hedge fund is designed to fit into the asset mix. The astute diversification of investments wins it for the investor.
Finally, investors should only choose well-established hedge fund firms. The common grumble against hedge funds is the lack of transparency. Hedge fund managers are secretive as to where the funds are allocated and how it is being invested.
Also, there’s a need to clarify at the onset the payment of management fees and fee-sharing arrangements. A rational investor should always weigh the risks and the cost whether the choice is a hedge fund or not.