A hedge fund is an investment schemewhere a small number of accredited and institutional investors contribute capital. It consists of wealthy investors, bankers, trustees of endowment funds, and insurance companies. These investors appoint a reliable fund manager to invest their money in diverseassets. These could include real estate, company stocks, currencies, equities, derivatives, and bonds. The manager uses complex risk management and portfolio construction techniques to maximizereturns on the fund.
Scott Tominaga is a financial specialist in America with 17 years of experience in hedge fund investments and back-office operations. He has an in-depth knowledge of accounting and statutory compliance requirements for firms providing financial services. Currently, he is the Chief Operating Officer of PartnersAdmin LLC in the USA.
He says hedge funds are suitable for small investors who fulfill the following criteria-
- Individuals with a net worth of more than 5 million dollars
- Those with an annual income of 200 thousand dollars in the last 2 years
They are called accredited investors in the investment market.
He explains investors should have an understanding of hedge fundsbefore investing. They must read the prospectus thoroughly before making a decision. The document informs them about their involvement, the time of investment, and potential risks. They even need to know how the fund manager values the assets, strategies, and fee structure. Investors must be aware of the limitations on their rights to redeem their shares into cash.
Characteristic features of hedge funds
The salient features of hedge funds are as follows:
- Only accredited investors can invest in the funds,
- The statutory regulations of the Securities and Exchange Commission do not apply to the funds,
- Investors are liable to pay for performance fees, which is 20% of their returns, and
- Investors must keep their money in the funds for a lock-in time of one year.
Hedge fund strategies
Hedge fund managers employ the following strategies to boost the investors’ returns:
- The equity market neutral, where they exploit the price differences in closely-related stocks,
- Merger Arbitrage, which involvesbuying and selling stocks in two companies merging,
- Event-driven plans where they use price inflation or deflation resulting fromspecific corporate events,
- Distressed debt where they invest in corporate bonds of companies facing a liquidity crisis, and
- The global macro where they place bets on significant macroeconomic trends like changes in interest rates.
Scott Tominaga sums up by saying hedge funds are ideal investment schemes for investors who want maximum returns. They should have an individual net worth of over five million dollars to invest in the schemes. They should even earn an annual income of two hundred thousand dollars.However, they should always read the prospectus before deciding whether to invest in the particular hedge fundscheme.
Only then will they get to know their risks, rights, limitations, and fees chargeable. They can even find out what strategies the fund manager uses to increase their returnsand, in the process, earn lucrative returns for their investments.