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    Exploring Hedge Fund Investing - A Guide For Investors

    With such a variety of investment opportunities out there today from shares, commodities, CFD’s, ETF’s, cryptocurrencies, bonds, property, mixed-use funds, property funds, one can be forgiven for not really knowing where to begin.

    Hedge fund investing is typically reserved for sophisticated investors ($250k+ annual salary over 2 consecutive years or $2.5million in assets) and institutional investors which can include super funds, banks, universities, basically, anyone who owns large assets or holds them for someone else.



    However, when investors are able to invest in these funds, they can be high performing although risky investment opportunities. In April 2019 with the best performing large cap funds in Australia in FY2018 realising returns of 26.31% and the worst returning 2.50%, while the mid/small cap saw 32.93% and 8.03% respectively[1], hedge fund investing is certainly offering plenty of opportunities.

    How is hedge fund investing different?

    Apart from the barriers to entry into the fund – being the minimum liquidity requirements and accountants sign off - hedge fund investing is quite different to mutual funds or exchange traded funds.

    A hedge fund can basically invest in anything – land, real estate, derivatives, currencies and other alternative assets. Mutual funds, by contrast, usually have to stick to stocks or bonds[2]

    In addition, they often use leverage or borrow money on the principal amount borrowed from investors, to amplify their returns, or leverage their accounts which can expose the investments to much higher risks as well.

    When it comes to the way the fees are structured, hedge funds are also different. Rather than a flat percentage fee, hedge fund investing attracts what is known as a “2 and 20” or 2% as an asset management fee of the total under management and 20% of any gains that are generated by the fund.

    To put it simply, hedge funds have almost the ultimate in flexibility, allowing exceptional money managers to create phenomenal returns for investors. However, just as there are exceptional returns, there have also been exceptional losses thanks for hedge fund managers.



    Hedge funds and the GFC

    The GCF or global financial crisis was primarily caused by deregulation in the financial industry and hedge fund investing. The changes permitted banks to engage in hedge fund trading with derivatives – or betting on the value or movement of the underlying asset, not the asset itself – for example, mortgages. 

    Banks then demanded more mortgages to support the profitable sale of these derivatives[3], leading to increases in ‘interest-only, sub-prime mortgages, which borrowers were unable to pay, then when the banks reclaimed the assets, they were unable to sell them exacerbated by a housing market collapse which pushed the economy to breaking point.

    Hedge fund investing has been responsible for not only the GFC, but the rise and collapse of many companies and institutions around the world and is a high stakes game for the players involved. With the ability to bet against markets, currencies, and even companies, fund managers have a lot of power at their disposable.

    With this power, comes the responsibly to realise significant returns for the investors, year in year out, but that is the art of exceptional hedge fund managers. To find out more, speak with a qualified and experienced hedge fund manager to get a better understanding of this investment pathway.

    [1] https://www.morningstar.com.au/funds/article/5-best-and-worst-performing-equity-funds-of-f/169076

    [2] https://www.investopedia.com/articles/investing/102113/what-are-hedge-funds.asp

    [3] https://www.thebalance.com/what-caused-2008-global-financial-crisis-3306176


    We welcome you to give our team a call to discuss your investment goals and objectives.

    You can call Walker Capital Australia on +61 2 8076 2210, and we’ll see how we can help you achieve your investment goals.

    For more information on hedge funds, check out our full article:  What is A Hedge Fund? The Essential Information For New Investors