Investment series: hedge funds
So far we have provided you with investment insights into the stock market and unit trust funds as well as offshore investments in our current investment series. We also recently posted an article detailing what exactly an alternative investment is, and in this blog we will be talking about hedge funds.
What are hedge funds?
Hedge funds are a form of alternative investments that are marketed specifically to large organisations or wealthy individuals. It is a private fund that owns interests in set securities, such as bonds, shares (or stocks) and warrants. Depending on the unique strategy that the managers of the hedge fund employ, the securities that the hedge fund owns can be a mix between local and international assets.
What is the aim of hedge funds?
Like with other forms of alternative investments, a hedge fund’s main aim is to offer its investors high returns at reduced volatility. This means that the hedge fund managers aim to manage the fund in such a way that its assets and value don’t fluctuate as profusely as one would associate with traditional investments like the stock market.
The hedge fund manager
Since a hedge fund manager is constantly involved with the management of the fund and its securities, a hedge fund manager has a claim on the profits made as a result of his labour. While this amount will be negotiated and agreed upon by the investor before commencing with the investment process, hedge fund managers generally charge as much as 20%. In addition to this, there is often an administration fee of 2% involved as well.
What we love about hedge funds:
- Hedge funds make more investment strategies available to its investors
- Since their investment strategies are more diverse, hedge funds have a larger spectrum of markets that it can invest in (more options and flexibility than traditional investments)
- When it comes to minimising risk and maximising returns, hedge funds are renowned for their success
What we wish we could change:
- Hedge funds are generally only marketed to select investors
- Most hedge funds have a high minimum initial investment amount (mostly, you would need access to millions in funds to be able to invest in a hedge fund)
- Hedge funds are less regulated than traditional investments, which could allow hedge fund managers to make more risky decisions with investors’ money (and if worst comes to worst, could leave you without a penny)