Hedgefunds are increasingly becoming one of the most popular financial assetsamong investors who wish to diversify their investment portfolio and earn highreturns in the process. Though the number of hedge funds present in the markettoday has increased, many do not know about these returns generating investmenttools.
If you also wish to diversify yourportfolio by investing in hedgefunds but have a lot of questions regarding the same, read on and findout about everything that you need to know about a hedge fund before investing-
What exactly are hedge funds?
Funds that pool money from various investorsand manage investment portfolios that earn high returns by using aggressiveinvestment strategies are called hedge funds. They haveaccess to various investment tools like derivatives and leverages that aretraditionally unavailable to their popularly known counterparts like mutualfunds. However, the amount of capital required to make an entry-level investment in hedge funds is also high comparatively. Since hedge funds are notas regulated as mutual funds, they are able to employ high-risk high-rewardtype of investment strategies that consistently generate returns that beat the market.
What should one keep in mind when investing in hedge funds?
Though hedge funds are fairly easy to understand and are enticing investment optionsfor many investors, there are a few things a beginner needs to keep in mindbefore investing in them for the first time-
1) Hedge funds usually have lock-in periods
Lock-in periods are pre-defined timeframes during which an investor can not withdraw his/her capital from the hedge fund. This is usually done to avoid any disruptions to the investment strategies that the hedge fund has already deployed using the capital acquired from their investors. Hence, you should be prepared financially for possible future emergencies before you decide to park your money in a hedge fund.
2) Hedge funds are not open to all types of investors
One can only invest in hedge funds if they are an accredited investor. High net worth individuals, institutional investors, banks, brokers, etc. are a few examples of accredited investors. This condition has been implemented as hedge funds are relatively risky investment options and accredited investors are generally considered to be well versed with the ins and outs of various financial markets. This makes them less susceptible to making investments mistakes that are generally made by amateur investors.
3) Hedge funds tend to be a little secretive
As an investor, you would naturally want to know all the possible details about the management of your precious capital. However, to avoid giving away their competitive advantage, hedge funds are usually reluctant in making such information public. Hedge funds are not required by law to report their business operations. Thus, apart from being able to choose the type of investment strategy, you do not get a lot of control over where and when your capital is used.
We hope this article clears all the doubts and questions that you might have in regards to hedge funds.
