August 17th, 2010 | 
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An often talked about investment alternative for investors has been Hedge Funds. A lot of individuals might have heard about this kind of investment vehicle yet many do not know exactly what they are all about. Ultimately, this type of fund is a pool of cash that the hedge fund manager can invest at his or her discretion using unique investment tactics. The goal is to achieve impressively large returns.
Investment Qualifications
Since a hedge fund uses discretionary investment practices, the investor must “qualify” to take part in the fund. Regulations state the investor must have at least $1 million in net worth and must meet the requirements of being an accredited investors (all this means is that the investor must have advanced investment knowledge). In other words, a fund will take only wealthy individuals who will invest a substantial amount at once (often $1 million or more) and who have a very strong investment knowledge base.
Underlying Investment Tactics
Since the objective of the fund is to provide investors with impressive, large returns, the risks that a hedge fund will take on are considered high. These high risk investments will include derivatives, leverage, short-sales and other higher risk tactics that more traditional and more highly regulated investment funds would never think of doing or could not do thanks to regulations.
Proven Results
For the most part, hedge funds have a history of providing investors with strong returns. This is particularly true during strong, upward trending markets. With that said, many hedge funds recorded tremendous gains during the mortgage and credit crises of 2007 by shorting those markets or taking bearish positions in them.
Higher Risks
Given the lack of regulation (for the most part) and investment choices, hedge funds clearly encompass higher risk than regular investments. These higher risks can and have led to steeper losses, which can be one reason why nearly 3,000 individual hedge funds have disappeared since the market problems that began in 2007. With a minimum investment amount in the seven figures, such investment vehicles can actually result in financial ruin for many wealthy investors.
Although these funds are an elite investment vehicle for many investors, they come with a substantial amount of risk. During good market periods, they often outperform the broader market by a large margin, allowing the rich to get richer and locking out “regular” investors from enjoy those gains thanks to strict regulations on minimum net worth and investment knowledge/experience.
One thing that many investors will find is that the fund manager will typically invest all of his or her assets within the fund while the outside investors will only invest a fraction of their wealth in one hedge fund so as to diversify their risk.
Posted in Hedge Funds | 
Tags: 1 Million, Accredited Investors, Crises, Derivatives, High Risk, Investment Choices, Investment Vehicle, Leverage