Investing 101: All About Hedge Funds

Hedge Fund written over a graphYou have probably heard of the term “hedge fund”, and know that it has something to do with investments. If you’re not part of the finance industry or are not an experienced investor, the term might not be of any use to you.

However, if you’re interested in diversifying your financial portfolio and are looking to maybe invest in a hedge fund, you’ll probably want to know everything you can about hedge funds. Let’s start with the basics.

How Exactly Does a Hedge Fund Work?

A hedge fund is a partnership made up of investors that utilize investing techniques that are considered high-risk to try and generate the highest possible return rates. Hedge funds come in various types, with the most common ones being long-short hedge funds, market-neutral hedge funds, and event-driven hedge funds.

According to a top financial advisor in Park City, a hedge could work with plenty of different asset types including stocks, real estate, and options. Once limited partners or investors give money to a hedge fund, the manager of the fund would select the strategy she or he believes would yield the biggest returns.

The Advantages and Disadvantages of Investing in a Hedge Fund

Plenty of hedge funds utilize leverage for making trades, meaning that they invest in assets by using borrowed funds. The great thing about this strategy is that it could potentially make investors lots of money.

Also, hedge funds are not governed by the same stringent SEC rules as other investment options like mutual funds are. This essentially means that hedge funds are more flexible in regard to investment strategies.

But while using leverage could potentially result in big returns, if a leveraged investment under-performs, the investors and the hedge fund could face significant losses.

Likewise, hedge funds are less liquid than other investment options, which mean that there’s a possibility that your money would be locked up in an under-performing fund for quite some time. They’re also commonly used by institutions and individuals with investing experience and a high net worth because of the high fees usually reserved for newbie investors.

The Bottom Line

Plenty of the special features that make a hedge fund an appealing investment option could be viewed as disadvantages or advantages depending on your needs, resources, and how you view them. Bottom line—they could provide sizeable gains, but could likewise result in significant losses.

That being said, hedge fund investing isn’t for everyone, so you might want to do thorough research and work with an experienced and reputable financial advisor before investing your money, as you might be better off with other investment opportunities.

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