Hedge Fund

A professionally managed, private investment partnership that utilizes a variety of techniques to generate returns including leverage, event-driven strategies, long/short hedging positions and arbitrage strategies. Hedge funds are not SEC regulated and are comprised only of “qualified investor” capital. They are usually closed to withdrawal for specified time periods. The goal of most hedge funds is to deliver regular positive investment returns regardless of overall capital market conditions.

THE PROs

  • Potential for positive returns regardless of market environment
  • Can protect the downside when stocks are falling
  • Access to leading professional managers

THE CONs

  • Heavily reliant on manager skill
  • Not SEC regulated
  • Generally high management fees (usually 1-2% of initial investment + 15-20% of returns)
  • Opaque, often confusing operations and investment strategies
  • Illiquid investment—investors have limited access to invested capital

KEY QUESTIONS

1. What is the stated investment objective of the fund?

2. How should the performance of this fund be influenced by general market conditions?

3. Please provide the manager’s total net of fees return since inception in the fund?

4. How is leverage used in the investment strategy and to what degree?

5. What specific strategies does the fund pursue to achieve its investment objective?

6. How much disclosure and reporting can I expect?

7. What specific risk control measures and guidelines are in place to protect invested capital?

 

RELEVANT VIDEOS

MoneyWeek explains what a hedge fund is and how it relates to your investment portfolio.

About.com explains the ins and outs of hedge funds.

About.com explains the ins and outs of hedge funds.

Watch this informative video from the Khan Academy referencing Hedge Funds