With the recent approval in July by the SEC that will allow hedge funds to advertise and market themselves, I thought it would be a good time to write about what hedge funds are designed for and some risks you should know about. This is not meant to imply all hedge funds are risky or bad investments, because there are some fine hedge funds out there. However, you should be aware of what these investments are because you are probably about to be exposed to their advertising.
1. Who are hedge funds designed for
For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the hedge fund must be accredited. That is, they must meet certain annual income requirements and have a net worth of more than $1 million excluding a primary residence. The idea is that investors who meet these requirements will have a significant amount of investment knowledge. Hedge funds can be thought of as mutual funds for the institutional and ultra-high-net-worth investors.
Hedge funds are generally illiquid investments as they often require the investor to keep their money in the fund for at least one year. They often invest speculatively to maximize capital appreciation. Most hedge fund investment strategies aim to achieve a positive return on investment regardless of whether the market is rising or falling. Read more »