Here on Your Personal Finance Pro, we discuss many alternative methods for generating income, including side hustles and passive investing. You may have heard of peer lending groups, such as Lending Club, that pool risk in order to achieve bigger gains. However, have you ever given much thought about hedge funds?
Hedge funds have similar objectives to mutual funds, but beyond that, the similarities end. Like mutual funds, hedge funds pool a group of investors’ funds together. These funds are managed by a general manager, who maximizes returns while minimizing risk. This is similar to mutual funds, which also combine a group of investors’ funds together in order to maximize returns. Like mutual funds, hedge funds also differ in investment strategies. As you are able to invest in different types of mutual funds (a specific region of the world, for example), you can choose different types of hedge funds as well.
Hedge funds differ from mutual funds in a variety of ways, one of them being the ultimate goal of hedge funds. Hedge funds are designed to make money regardless of whether or not the market climbs higher. This is possible because managers “hedge” themselves by going long or short on stocks.
In addition, hedge funds are less regulated than mutual funds. This allows them to pursue more aggressive risk (in terms of investments and strategies) to obtain bigger rewards. However, hedge funds are able to pursue greater risk because their investors must be accredited and able to take on a certain level of risk.
How Can Hedge Funds Help You?
Hedge funds are yet another way for you to invest and generate income. While hedge funds aren’t for everyone, they are potentially a great asset to add to your income generating portfolio.
Hedge funds are not one-size-fits-all. Hedge funds pursue many different investment strategies, including macro, equity, and activism. For example, a macro hedge fund invests in typical stocks, bonds, and currencies in hopes of profiting from changes in macroeconomic variables, like global interest rates and countries’ economic policies. Activist hedge funds, on the other hand, typically have a less diversified portfolio and take a long-term approach. They are designed to maximize profit from corporations through governance and management.
Who Should Invest in Hedge Funds?
In the past, hedge funds were only accessible to people willing to put millions, from $5 million and up, into their hedge fund investments. However, that is now beginning to change. Sliced Investing, for example, is able to offer investments in hedge funds at lower minimums. Sliced Investing has minimums as low as $20,000, which is much lower than most hedge funds in the marketplace.
However, you will have to be an accredited investor in order to invest in hedge funds. An accredited investor is someone with a net worth of at least $1 million (excluding the value of your primary residence) or who has an income exceeding $200,000 in the past two years.
If you meet these qualifications and are interested in investing in hedge funds, than Sliced Investing may be an avenue you would like to pursue!
Why Invest in Hedge Funds?
Hedge funds offer many benefits to your investment portfolio, including:
- Diversification – many people are not invested in hedge funds, and with the low minimums required by Sliced Investing, you are able to broaden your investments beyond the average
- Risk-adjusted returns – while hedge funds are not designed to outperform the markets on an absolute basis, they are designed to provide a steady return regardless of overall market conditions
- Flexibility – because hedge funds are less regulated than mutual funds, for example, they are allowed to take greater risks in the market. This can be beneficial for your investment portfolio, as it can open you up to more markets than you would have otherwise had access to
As with all investments, you will want to do your homework before investing in hedge funds. Luckily, understanding your hedge fund is similar to researching and understanding stocks you invest in. You’ll want to read your fund’s materials and prospectus and also understand any fees associated with your hedge fund. Hedge funds typically charge an asset management fee of 1-2% of assets, plus a “performance fee” of 20% of the hedge fund’s profit. Make sure you understand your hedge fund’s fees, and ask questions if you want more clarification.
That said, hedge funds offer an interesting and dynamic way to grow your investment portfolio. It is yet another avenue for you to pursue on your way to achieving financial freedom.
Disclosure: This blog post was written for Sliced Investing pursuant to a paid content arrangement I have with the company’s representatives as part of an effort to raise awareness about alternative investment options.
Readers, what do you think?
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