Hedge funds got a bad rap in the 2007 Great Recession that took years to recover from. Their exclusivity, too, has alienated many potential investors despite the advantages this brings. Here are 3 reasons to invest in hedge funds. We’ll also address concerns that sometimes scare people away from considering these investment options.
Their ability to buy on leverage isn’t restricted as it is with mutual funds. Hedge funds like Pine River Capital Management, which was featured on the Investing PR top hedge funds list, use short selling or derivatives to make money or manage risk. Their fund managers don’t have to be fully invested, giving them the ability to hire talent other investment funds won’t. They can invest across many different asset classes as part of a strategy to earn high returns and disconnect from the general stock market.
Their ability to invest in currencies and emerging markets and take risks on new stocks your age-based investment fund cannot, are more reasons why hedge funds can see far higher returns than the average mutual fund. The only caveat to this flexibility is that hedge funds may require you to invest for a year or more, limiting your ability to withdraw your money whether you need it, or the market is declining. Withdrawals are then allowed on a semi-annual basis.
If the potential rise and fall of the hedge fund worries you, you can buy into a low volatility hedge fund that sees good returns without as much risk. You can also invest in hedge funds with market sector focus, such as funds investing in everything “water” from funding desalinization plants to water and sewer system construction firms. You would have trouble finding nearly as niched in the general stock market short of buying individual stocks and bonds, and that’s a high-risk strategy.
They don’t have to evaluate the hedge fund’s performance against benchmarks, but most hedge funds see far better performance than the standard mutual fund. This is why hedge funds are in demand, though they aren’t publicly traded, and the high minimum investments tend to keep hedge funds out of reach for the average investor. Their ability to make decisions to profit from a falling market also allows you to avoid stock market losses seen in your general mutual fund.
You will see far higher profits on average with hedge funds even after the one to two percent asset value management fees and fifteen to twenty five percent gross returns as a performance fee. Yes, hedge funds are so profitable they can charge fees this heavy and still generate significant returns. This is in addition to the taxes you have to pay on the trades that you don’t have to pay until you withdraw money at retirement for your retirement account’s managed funds.
Your retirement fund manager may not be allowed to invest in certain things like cryptocurrencies because they are considered too speculative. Conversely, hedge fund managers are not bound by these restrictions. In fact, hedge funds can invest in financial instruments almost no other fund can buy. This means that hedge funds are a great way to diversify your portfolio. Some people are put off by the fact that hedge fund managers are not bound by the same public disclosure requirements as publicly traded funds, but those rules didn’t prevent corporations from cooking the books and going bankrupt like Enron, or play political favorites to short bondholders as GM did. Yet hedge funds can invest in companies that aren’t selling stock or bonds on the general market or even speculate in penny stocks that mutual funds cannot.
As you can see, hedge funds have many characteristics that make them attractive to a certain type of investor. Hedge funds give investors flexibility, whether targeting specific market sectors or investing in things mutual funds cannot. They see far higher overall returns even after their higher fees and taxes compared to other investment alternatives. They let you diversify your holdings by investing in products mutual funds cannot buy, utilize leverage and position themselves to profit when the stock market is headed down.