Hedge funds are somewhat similar to mutual funds except that these are meant for securing higher returns. These are hedged against losses in the market through investments in a much wider range of assets. They will not be subject to the same scrutiny regulations as mutual funds and this explains why hedge fund managers have far more flexibility to take risks and operate without inhibitions. No surprises then why hedge funds will be limited to the accredited investors or those who have the means to pay high fees and can withstand heavy potential losses.
How Does The Hedge Fund Work?
The hedge fund will pool money from multiple investors for buying securities and investments. This is where it is similar to ETFs or exchange traded funds and mutual funds. But that is where the likeness ends because hedge funds will employ far more aggressive strategies like short-selling, debt-based investing, and leveraged-investing. Hedge funds tend to be risky as they wager on investments that seek short-term gains. These risky strategies are adopted by them to get returns no matter what the market conditions are.
How To Invest In A Hedge Fund:
- To start investing in hedge funds you must first research thoroughly on the funds that are taking new investors. You can benefit from online research tools or get expert advice from financial advisors to identify the best hedge funds.
- When you have researched, you can contact them to acquire more details about the minimum investment requirements.
- You must verify that you fall in the category of accredited investors. There is however no standard accreditation authority and every hedge fund will have its own method to determine whether you can invest in it. You may be required to provide your assets, income, debts etc and have this information attested by third parties, such as an attorney, an investment advisor, or any financial institution where you have accounts.
- When you do not meet the firm’s criteria for investing in a hedge fund, you have rather limited options; you can instead choose to invest your money in mutual funds, ETFs and other funds using strategies like hedge funds, namely short-selling and leveraged investing.
- When you meet the requirements you must vet the fund or review it well. You can focus on its prospectus and marketing; you may consult an advisor at this stage to get an insight into its risk potential. He will tell you if the fund fits your investment needs and goals. It is foolish to look only at its history of returns; without a proper risk evaluation, you could end up with losses.
- You must also focus on the fund’s assets and evaluate its holdings. This is because such funds typically have investment assets that are hard to sell.
- You must look at the fees involved because hedge funds usually charge high fees compared to mutual funds. You will probably have to pay 1%-2% of the total assets together with 20% performance fees depending on the fund’s profits.
- In a hedge fund, you cannot expect to redeem your shares at any time you like. So, find out about redeemable timelines as there may be lockdown periods when you will not be able to withdraw your money.
- The best tip to invest in a hedge fund is to research the fund manager who plays a crucial role in your success.
- Make sure you do not write out any checks until you have got satisfactory answers to all questions concerning the fund. You must have complete information about who is managing the fund and how investments will be made. Unless you are satisfied you should keep your search on.
Top 10 Hedge Fund Firms In The World:
- Bridgewater Associates, based in Westport, Connecticut, offers services to foreign governments, pension funds, university endowments, central banks, institutional investors and charitable foundations. It was set up by Ray Dalio in 1975 at New York. Today it offers funds like the Pure Alpha focusing on active investment strategies, Pure Alpha Major Markets targeting opportunities which the Pure Alpha invests in, All Weather fund that uses asset allocation strategy, and Optimal Portfolio combining All Weather Fund and active management.
- AQR Capital Management, located in Greenwich, Connecticut, uses quantitative analysis for creating financial models. In March 2020, AQR owned $143 billion under its management. The company was created by Cliff Asness together with Robert Krail, John Liew, and David Kabiller. They had earlier worked as a team at the Goldman Sachs hedge fund firm.
- Renaissance Technologies, based in NYC, uses statistical and mathematical models for discovering technical indicators that influence automated trade strategies. They use such strategies for US and global equities, futures contracts, debt instruments, and foreign exchange. It was founded in 1982 by mathematician Jim Simons.
- Two Sigma Investments is also located in New York and set up by David Siegel and John Overdeck in 2002. This firm makes use of quantitative analysis for creating mathematical strategies using historical data and price patterns.
- Davidson Kempner Capital Management, located in New York, managed offices in Dublin, Hong Kong, and London. It started managing funds for investors back in 1987 and deals with merger arbitrage, bankruptcies, event-driven equities, distressed investments, etc.
- Citadel Advisors are Chicago-based hedge fund firm focusing on fixed income, commodities, equities, quantitative strategies. Citadel is reported to have $28.89 billion worth of assets in December, 2019. It was founded by a 19-year old Harvard sophomore Kenneth Griffin at his dorm room.
- Millennium Management is also New York-based and created in 1989. It provides discretionary advisory services and had almost $42 billion worth of assets under its management in December, 2019. Israel Englander, the Chairman of the firm, leads it and he founded this firm with $35 million.
- Elliott Management claims to have a broad mandate in investments and includes almost all types of assets like equities, arbitrage and hedging positions, real estate securities, commodities, etc. This New York-based firm was founded in 1977 by Paul Singer.
- Man Group is a British hedge fund with more than 230 years trade experience and had begun in 1784. They were suppliers of rum to Britain’s Royal Navy and eventually made their entry into cocoa, sugar, and coffee trading.
- Black Rock Fund Advisors is a New York-based firm managing trillions worth of assets. It was founded in 1984 while the BlackRock Financial Management came about in 1994. It oversees nearly $1.03 trillion.