Investing in Hedge Funds
A hedge fund is an investment structure that allows investors to pool resources. These resources are then use in huge investments like bonds and stocks among others. Hedge funds are usually associated with wealthy people. And one often has to be an accredited investor to qualify as a member. Your membership can be approve if you are consider a sophisticated investor.
Considerations when investing in hedge funds
As earlier stated, you can only join the fund as an accredited or sophisticated investor. This means that there is some minimum income that you will be required to be earning either in person or as a married couple. Your net worth will also be considered. A sophisticated investor is one who is considered to have relevant knowledge and well experienced to evaluate the merits/ risks associated with a given investment.
2. Lock-up and limitations
By investing in a hedge fund, you will be required to abide by the set limitations, and this means that you will only be allowed to sell or redeem you shares after the stipulated time period. The managers can also impose “lock-ups” that can even last for more than a year. You cannot redeem or cash in your shares during this period.
3. Applicable fees
You should take the time to understand the fees that you will be dealing with after making your investment since these can weigh heavily on your returns. Typically, you will be required to part with management fee that is usually charged at 2% of your total assets. There will also be a 20% performance fee that is charged on the fund’s profit. The latter is meant to find the best fund managers.
4. Involved risks
The risks involved in investing in a hedge fund are pretty high since the managers are known to invest in sophisticated techniques and strategies in trying to get the best returns. In order to understand all this, you should go through the information in the prospectus of the hedge fund you are considering. You should also understand how the assets valuation process works since this can be pretty hard for some investments.
To ensure that your investment is safe, it is wise to consider the background of the fund managers to confirm that they are qualified and able to deliver. You should also try to understand the way they operate since some of them will employ techniques with high return potential but greater risks.
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