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Despite being called “hedge” funds, these investment vehicles are quite risky.

Hedge funds are pooled investment funds that aim to maximize returns and protect against market losses by investing in a wider array of assets.
Hedge funds charge higher fees and have fewer regulations, which can make them riskier.
Individuals, large companies, and pension funds may invest in hedge funds as long as they meet asset requirements.

A hedge fund is a type of investment that’s open to accredited investors. The goal is for participants to come out ahead no matter how the overall market is performing, which may help protect and grow your portfolio over time. But hedge funds come with some risks, which you’ll need to consider before diving in.

What is a hedge fund? 

A hedge fund is a private investment that pools money from several high-net-worth investors and large companies with the goal of maximizing returns and reducing risk. To protect against market uncertainty, the fund might make two investments that respond in opposite ways. If one investment does well, then the other loses money — theoretically reducing the overall risk to investors. This is actually where the term “hedge” comes from, since using various market strategies can help offset risk, or “hedge” the fund against large market downturns.

Quick tip: To invest in a hedge fund, you’ll need to show you’ve earned at least $200,000 in each of the past two years ($300,000 for married spouses) or you’ve got a net worth of at least $1 million. The hedge fund will also have a minimum buy-in.

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Understanding how hedge funds work 

Hedge funds have a lot of leeway in how they earn money. They can invest both domestically and around the world and use just about any investment strategy to make active returns. For instance, the fund may borrow money to grow returns — known as leveraging — make highly concentrated bets, or take aggressive short positions. 

But that flexibility also makes these investment vehicles risky, despite being called “hedge” funds. “There’s no transparency in hedge funds, and most of the time, managers can do whatever they want inside of the fund,” says Meghan Railey, a certified financial planner and co-founder/chief financial officer of Optas Capital. “So they can make big bets on where the market’s going, and they could be very wrong.”

The elevated risk is why only accredited investors — those deemed sophisticated enough to handle potential risks — can invest in this type of fund. To be considered an accredited investor, you’ll need to earn at least $200,000 in each of the last two years ($300,000 for married couples) or have a net worth of more than $1 million. 

Quick tip: Thinking about investing in a hedge …read more

Source:: Business Insider

      

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