Do You Know Which Hedge Funds Are Right for You?
Traditionally, hedge funds have not been allowed to advertise to the general public. Why? Because they’re deemed “too sophisticated” an investment for more people. You have to be an accredited investor. That means, if you have the money, you sort of need to do your own research. And here’s where things get tricky. Everyone you talk to will say that they have the best fund. How do you sort the wheat from the chaff?
Look For Market-Neutral Funds
All good hedge funds have one thing in common: they’re market neutral. What does that mean? It means that the fund adopts an investment strategy such that the returns aren’t greatly influenced by equities or bonds.
Hedge funds do what the name implies: they hedge against pretty much everything. At the end of the day, the fund should perform like an entirely different asset class, deriving its total return from assets that wont’ be harmed if the stock or bond market crash.
Amass A Savings First
When looking for the best hedge funds out there, you must keep in mind that they typically aren’t open to anyone who has less than $1 million to invest. Sure, if you’ve got a few hundred thousand dollars, you might be able to get in on a smaller fund, but these aren’t as good as the ones with a higher minimum deposit. Why not? Because the best and brightest managers want to make good money – they want to be well-compensated for their skill.
To that end, they’re only interested in working with people who have a lot of money. A big bank roll means higher fees. Higher fees translate into more income for the fund manager. It really is as simple as that. Not fair? Think about it this way: BMW makes a premium automobile. Why doesn’t it sell its products for the price of a Honda or Kia? Because the fit and finish on a BMW is superior. There’s a lot more research and development done on a BMW.
The engineers, and the company, want to be compensated for the additional effort.
Don’t Rely On Advertising
Now that hedge funds can advertise, you’d expect to see more attention-grabbing headlines in front of your face. Odds are, you won’t. And the ones that you do see will probably be the usual ad copy. Marketing departments for hedge funds are charged with one goal: to bring money in for the fund.
Sure, they can tell the truth, but that’s not the primary goal. Funds don’t have to disclose short positions, for example, so you’re unlikely to see what the fund is speculating on. You’ll only see long positions. Why does this matter? Because a speculation play could turn the whole portfolio sour – you’ll never know until it’s too late.
Watch Out For Fees
Fees are the biggest eroder of wealth. The higher the fee relative to the investment return, the lower your net return and net savings. It seems like common sense, but many investors get caught up in the hype of a hedge fund’s story that they forget about what the fund is actually charging them to invest.
Andrew King is a finance expert. He loves to share his ideas about complex topics on personal finance blogs.
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Category: Investing
