How Do You Invest in Hedge Funds?

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If you ever hope to retire, you need to invest far more money than you save. Saving money is a losing man’s game. Inflation will destroy your savings, as it effectively eats your money before it can do you any good.

While managing finances means having a padded savings account, most of your money should go straight into various investment vehicles. While there are countless different ways to invest in order to earn a yield on your hard-earned cash, hedge funds are one of the best. 

When you invest in hedge funds, you get the benefits that come with an actively managed portfolio that seeks to maximize gain potential.

While hedge funds come with more risk, they also come with much greater rewards.

Wondering how to invest in hedge funds, to start exposing your portfolio to higher gains? Read on below to find out now. 

What are Hedge Funds?

Stocks are one of the most popular investment vehicles available today. With a stock, you own a share of a company. When that company does good, you, as the shareholder, benefit. 

But there are many ways to benefit from the increasing value of stocks. Of course, you can buy and hold individual stocks directly. But holding individual stocks may expose you to more risk. So many people turn to vehicles like index funds and mutual funds.

These are collections of many different stocks, that provide a balanced portfolio of well-performing companies. By investing in these, you get the benefit of investing in many different companies, without having to purchase and manage many different stocks. 

Hedge funds are just another type of stock investment. With a hedge fund, you invest your money into a fund. That fund is then actively managed to buy and sell various stocks on an ongoing basis. 

Rather than sitting back to enjoy passive, slow gains, these funds are managed by portfolio managers to actively earn higher yields. The strategies employed are much more aggressive than those used in index funds or mutual funds. 

Structure of Hedge Funds

Hedge funds are unique in that they employ a partnership model. Investors in hedge funds are considered partners in the entire process. They are limited partners that invest capital, but don’t do anything else.

The portfolio manager is the managing partner. They may or may not contribute funds of their own to the pool, but they are a partner because they are the ones working to actively manage the fund. 

Managing partners earn compensation in the form of fees charged to the limited partners, or investors. The management fee is usually 2%, while they also earn a 20% commission on all gains achieved. 

How Hedge Funds Work

The goal of the hedge fund is to maximize gains while reducing risk through active trading strategies.

The overarching strategy of the hedge fund is to hedge risks. They do this by both going long and shorting stocks, depending on market conditions. That way, gains can be made whether the market is going up or down.

With these strategies in place, hedge funds resemble active trading. 

But hedge funds differ from other stock investment vehicles, like mutual funds, in that hedge funds aren’t limited to stocks. Rather, you can find hedge funds investing in alternatives like commodities or real estate.

But each hedge fund is different and discloses its goals and strategy upfront. They won’t surprise you by changing investment vehicles. Each fund sticks to its original mandate, which you should research thoroughly before investing in any funds. 

Requirements for Investing in Hedge Funds

Hedge funds are an incredible investment opportunity if you can stomach the added risk. The only problem is that most hedge funds are only open to accredited investors. 

An accredited investor is someone who has a net worth of more than $1 million or has an annual income of over $200,000 per year. 

Other asset classes and funds, such as mutual funds or index funds, may or may not have any investor requirements. Each fund can set a minimum investment limit, requiring anywhere from $100,000 to a million or more to gain access to a fund. 

How to Invest in Hedge Funds

Hedge funds are private funds offered directly by hedge fund companies. That means you can’t invest in them through your stockbroker. 

You’ll need to research the funds, of which there are thousands available in the US, and find the one(s) you want to invest in. Most hedge funds are not actively accepting new investors, so you need to find the ones that are open.

Familiarize yourself with the investment strategy and assets that they focus on. Then, look up investor requirements to ensure you can qualify for that particular fund. It’s not easy to get into a quality fund.

You’ll start by contacting the hedge fund provider, and prove that you’re an accredited investor. Each company will have its own process of verifying your investor status, since there is no centralized authority on these unregulated investment vehicles. 

Once accepted into the fund, you’ll follow the companies guidelines on depositing your initial fund balance.

Your funds will be locked up for most of the year. You can’t withdraw them whenever you want. Generally, you have four opportunities per ear to withdraw all or some of your funds.

Keeping funds locked up in the pool allows the managers greater control over their active investing process to ensure the most gains. 

What to Do if You Can’t Invest in Hedge Funds

Most people can’t invest in hedge funds. Even accredited investors struggle to get into quality funds since minimum deposits are so high.

If that’s you, there are many ways to get similar levels of performance. The basic way would be to invest in mutual funds. The safest way is to invest in index funds.

And another way to resemble the hedge fund experience is with exchange-traded funds (ETFs). Most people don’t need the level of financial help that hedge funds provide anyway. Never be discouraged, as there are always ways to grow your wealth.  

Wealth Building Strategies

Now that you know what hedge funds are and how to invest in hedge funds, you can decide if you’re eligible and if it’s the right strategy for you. For those with the capital, it’s a great way to lock up and grow your wealth over the long term.

And even if you can invest in hedge funds, you should still only allocate a portion of your portfolio to one single strategy.

Looking for more finance and investing tips like this? Head over to our blog now to keep reading.