Learn the features of hedge funds that you should know before making your decision to put your money in this investment option. Details of the key features as well as the limitations are as follows:
Key features of hedge funds
1. This investment option is usually for the super rich. Excluding their primary residence, hedge fund investor must have net worth exceeding $1 million in order to be eligible for this investment strategy. So it can be said that hedge funds are only open or qualified or accredited investors.
2. As compared to mutual funds, hedge funds have wider investment latitude. Basically, the mutual fund has to stick with bonds and stocks only. However, the latter is practically free to invest almost in any asset classes like stocks, derivatives, land, real estate and currencies. The fund manager must however pay careful attention to securities and exchange.
3. It often employs leverage by using the borrowed money of customers to get great returns. However, leverage may completely wipe out funds as we saw during the financial crisis of 2008. The fund manager has the responsibility to apply the best strategies.
4. The hedge fund charges both a performance fee and an expense ratio instead of charging expense ratio only. The fee structure is popularly called Two and Twenty as they charge 2 percent asset management fee and then cut off 20 percent of any gains that have been generated.
The opportunities of hedge funds are limited as compared to loans. This is so as the institution cannot raise more than $5 million in the period of 12 months. They can also not raise money from more than 35 non accredited investors. One cannot advertise hedge funds, so if an investor is looking to invest then he has to keep close contact with an affiliated dealer or broker. The general partners of hedge funds, the hedge fund managers, have full authority to accept or reject investors without any cause or reason.