If you are fortunate enough to be seriously contemplating a partnership with a well-known hedge fund then you don’t need to be reading this. For the rest of you, a hedge fund is one of the investment tools you will aspire toward as a serious investor.
The first hedge fund came out in 1949 as a strategy to neutralize the effect of overall market movements on a portfolio. The strategy was simply to buy stocks that were expected to rise and selling short stocks expected to fall. The concept was to add BALANCE — to produce returns that were not market-dependent and tended to hedge a portfolio’s market exposure. Nowadays, that has changed in a very fundamental way; besides protecting a portfolio from downside risk, hedge funds often go for maximum return by deploying large amounts of leverage and investing in several asset classes among global markets.
The typical hedge fund is designed to be a partnership arrangement with the fund manager acting as the general partner responsible for making investment decisions. To join, you must be an “accredited investor” which is defined as a person with a net worth of at least $1 million (or an annual income of at least $200,000 for the past two years and expectation of continued income in that range). These levels are due to increase. These private investment funds are usually not registered with the SEC and use complex investment strategies in order to secure a targeted rate of return. For this reason, they are not marketed to the average investor, but instead to high worth individuals and professional investors. For those aspiring toward this goal, here is what you will need to get started:
- An average starting investment of $250,000 – $500,000 USD. Although some “so-called” funds start as low as $10,000 it is uncommon. Top hedge funds require as much as $10,000,000 or more to play.
- The ability to lose money. When it comes to hedge funds, you have to pay to play. Even if the hedge fund loses money, you will owe management fees and other costs and of course, your principal is at risk.
- Acceptance. Remember, hedge funds are typically formed as partnerships. There are over 6,000 funds available, but they don’t take just anyone. By law, you must be a qualified investor and able to meet specific guidelines.
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