What Are Hedge Funds? How Do You Get In One?
What are Hedge Funds?
A lot of people are asking What are hedge funds? How can I get in one? First of all lets start off by finding out the definition of hedge funds in the dictionary. The definition of hedge funds is that they are a limited partnership of investors that uses high risk methods, such as investing with borrowed money, in hopes of realizing large capital gains. In other words, Hedge Funds are a type of Investment Fund that pools money together from Institutional Investors or Accredited Investors to invest in various assets such as; (stocks, bonds, futures, real estate and etc.) with risk management techniques in an effort to make a positive return on investment.
A Little Hedge Fund History
The term “hedge fund” originated by holding long term stock positions and short selling stock positions at the same time to be used to hedge market risk. The first structured hedge fund was launched in 1949 by Alfred W. Winslow (founder of A.W. Jones & Co.) who used leverage to buy more shares, and used short selling to avoid market risk.
Investing In Hedge Funds
Now that you know what Hedge Funds are. There are a few important things you must know be you invest in one.
- You must be an Accredited Investor: Which means you must have a net worth of at least $1,000,000, excluding the value of one’s primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year
- You should read the Hedge Funds Prospectus: Make sure you understand the level of risk involved in the hedge fund’s investment strategies, and that the risks are suitable to your personal investing goals, time horizons, and risk tolerance. As with any investment, the greater the potential returns, the greater the risks you must assume.
- You should understand the Hedge Fund’s Fee Structure: Most funds have a 1% to 2% Management fee structure to pay expenses such as (salaries, rent, and etc), and a 20% Performance fee structure to pay administrative costs, salaries, bonuses etc. For an example, a hedge fund pools in $100 million dollars from its investors. The Management fee would be $1 million for a 1% fee and $2 million if fee is 2%. If the Hedge Fund makes a profit of $20 million then the Performance fee would be $5 million because 20% of $20 million is $5 million.
- You should find out what are your limitations on Share Redemption: Most Hedge funds impose a “lock-up period” in which you can not cash in or redeem your shares for a period of 1 year or more. Some may allow you to redeem or cash in your shares up to 4 times a year. So it is very important to make sure you find out what their Share Redemption limitations are.
- You should do research on the Hedge Fund Managers: Sense the Hedge Fund Managers are managing your hard earned money it would be a very good idea to see if they are well qualified, and that they have a good history in following the SEC rules and regulations. There are different ways you can research the Hedge Funds Manager. 1) By visiting the Investment Adviser Public Disclosure website to look up an adviser. 2) Search FINRA’s BrokerCheck 3) Calling your State Securities Regulators
- You should NOT be afraid to ask questions: If you feel uneasy, unsure, and still have questions about the Hedge Fund and it’s managers ASK THEM! There is No such thing as asking too money questions when it comes to YOUR money.