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Stock Market

What is a Hedge Fund and Why Should You Invest in Them?


Have you ever heard people talking about investing in a hedge fund? I have, but until recently I had no idea what that really meant.

What is a Hedge Fund?

According to Investopedia, hedge funds are “alternative investments using pooled funds that may use a number of different strategies in order to earn active return for their investors. Hedge funds may be aggressively managed or make use of derivatives and leverage in both domestic and international markets with the goal of generating high returns. Because hedge funds may have low correlations with a traditional portfolio of stocks and bonds, allocating an exposure to hedge funds can be a good diversifier.”

Did you get all of that? If not, here’s a more simple explanation: a hedge fund is a different way of investing so you can diversify your portfolio and (hopefully) earn a higher rate of return. Hedge funds are usually also invested in something that will earn a pretty consistant rate of return, no matter what the rest of the investment market is doing. This makes hedge funds good to invest in during bad times, but they can a little too conservative during good times.

Why Should You Invest in a Hedge Fund?

Investing in a hedge fund is a whole other ballgame than investing in most other types of investments. Hedge funds have few regulations from the U.S. Securities and Exchange Commission, the government agency charged with protecting individual investors, and that means that sometimes hedge fund investments can be risky.

Before you invest in a hedge fund, a hedge fund manager will ask you outright to prove that you have the capital to invest in the fund.

Hedge funds are funded by more than 1 investor and the manager is responsible for investing everyone’s funds in order to help them gain a return.

As mentioned, a hedge fund can be a good way to diversify your investment portfolio and to earn a return, but it can also be risky.

Hedge funds managers have a tough job finding investments that will perform as expected and generate returns for investors. When they choose well, they are rewarded handsomely for their work.

According to an article by Forbes, “Managers are legally allowed to accept investments from up to 35 people who aren’t accredited investors. But the only way a nonaccredited investor might get into a hedge fund is if he or she knows the manager personally, says Jim Gillies, chief information officer at HedgeFund.net, a free industry Web site for accredited investors and Forbes Best of the Web special selection.”

The article also says that in order to become an accredited investor, you and your spouse need a combined net worth of $1 million–not too high a barrier, considering this can include the estimated value of your home. You’ll also need an individual income of $200,000 or a joint income of $300,000. Many people worry that these requirements don’t go far enough, but the figures, which were set in 1982, haven’t been adjusted since.

Have you ever thought about investing in a hedge fund?

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Erin Thompson

Erin Thompson spent years managing her own blog about budgeting and debt. Because of that, she has great insights not only about managing spending and borrowing but also about running websites profitably. When she's not writing articles for us, she's traveling and looking for new types of wines to try.
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The content on Cashblog.com is for informational and educational purposes only. It is not financial advice and we are not certified financial advisors. Cashblog.com strives to keep its information accurate and up to date, but it may differ from actual numbers. We may have financial relationships with companies listed on our site. We may receive compensation for the placement of sponsored products or services. We work hard to write authentic and accurate articles.