The first hedge funds were designed to hedge against the downside risk by shorting stock – selling securities an investor doesn’t own hoping that it will decline in price so it can be purchased back at a lower price. Hence the word “Hedge”. Today, hedge funds use dozens of different strategies and don’t just hedge risk. A newer offering is a “Fund of Funds.”
Because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.
Today, Hedge Funds are an aggressively managed portfolio of investments that use advanced investment strategies such as leveraged, long, short and derivative positions with the goal of generating returns to outperform its relative benchmarks.
They are often set up as private investment partnerships that require a very large initial minimum investment and are illiquid as they require investors keep their money in the fund for initial period.
Hedge funds are unregulated because the majority of investors in the fund must be accredited and have a net worth of more than $1 million, along with a significant amount of investment knowledge.
“Fund of Hedge Funds” are offered by as an alternative to investing directly into individual funds. There are advantages and disadvantages to funds of hedge funds depending on the investor.
Funds of funds are made up of a variety of other funds. They typically have lower minimums and are a way to invest in hedge funds with broad diversification.
Some funds of funds invest in hedge funds with a variety of different strategies and a much higher level of diversification, while single-strategy funds, will invest in a variety of funds having the same or similar strategies.
All investment options utilizing this strategy involve risk and investors can lose their principal and may not be suitable for all investors.
This article is for informational purposes only and is not a complete summary of information needed to recommend any investment. Consult the appropriate professional to determine how this information applies to your unique situation. Fund of hedge funds involve special considerations and risks not associated with an investment in traditional mutual funds. Each fund’s investment program is speculative and includes risks inherent with an investment in securities, as well as specific risks associated with the use of leverage, short sales, options, futures, derivative instruments, and investments in “junk bonds”, non-US securities, illiquid investments and limited regulatory oversight. Each fund is a non-diversified fund and invests in Hedge Funds that may invest a substantial portion of the assets managed in an industry sector. Higher fees, potential investor income qualifications and strategy limitations must be considered in any suitability determination. Prior to investing, one must consider a fund’s offering memorandum and related materials, investment strategy which may include leverage or speculative techniques, evaluate conflicts of interest, understand how a fund’s assets are valued and performance is determined, manager background, and fees and expenses among other details.
About the Author: Charles Marsala is a Financial Advisor with Benchmark Investment Group with Securities offered through LPL Financial, a member FINRA/SIPC. He can be contacted at Charles.Marsala@lpl.com