By now, you may have read our lessons on private equity fund structure, the stages of venture capital investments or angel investors. All of these investment structures are similar, though the extent of their governing rights and the maturity stages at which investors fund businesses differ in meaningful ways. In this lesson, we will add hedge funds to the pantheon of alternative investments.
So, what is a hedge fund?
A hedge fund is an alternative investment method in which a group of limited partners use high-risk or aggressive methods of investing in the hopes of making a high return, typically in a shorter period of time. Hedge funds are not required to register and report to the SEC, so their strategies can be opaque.
Hedge funds and private equity funds are similar in that they pool capital from investors and are actively managed by a fund manager. Their goal is to receive a high return on investment, and the fund takes a percentage in performance and management fees. For the most part, that is where their similarities end. However, there are many more differences between the two, such as the following:
Hedge funds are attractive because of the potential for very high returns. However, not everyone can invest in a hedge fund. First, you must be an accredited investor with a net worth of $1 million or an annual income of $200,000 or more. However, large hedge funds can set their minimum contribution to $5 million or more. In the past, hedge funds were comprised of wealthy individuals, but hedge funds have become more institutionalized over time.
Investing requires due diligence, and investors should research top hedge fund managers or traders and hedge fund firms to find the right one. In addition, it doesn’t hurt to get the opinion of a financial advisor to determine if the risk is appropriate for your investment portfolio.
[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Opportunity Amidst Crisis- Buying Distressed Assets, Claims, and Securities for Fun & Profit and Options for the Accredited Investor.]
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