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A hedge fund for many is a financial vehicle that they need not be too concerned about, one that simply can’t be accessed due to the large capital requirements and liquidity as a ‘sophisticated investor’ required to become involved in such a fund.
However, hedge funds can be extremely useful tools to – as the name suggests – hedge investment portfolios against profitability, as well as provide capital growth opportunities through a wide range of investment opportunities.
A hedge fund is a pool of investors capital that is managed by a hedge fund manage according to the particular fund’s strategy which investors buy into. Often considered more risky, aggressive and exclusive that mutual funds, buying a metaphorical ‘seat at the table’ of a hedge fund can often be very high[1].
Where a mutual fund usually can be sold to an unlimited number of investors, may advertise freely and through a prospectus or information memorandum. A hedge fund can only be sold to a limited number of sophisticated investors, usually by a private placement memorandum[2].
Unlike many other funds such as mutual funds or exchange transfer funds (ETF’s), hedge funds have a lot of flexibility and control given to the hedge fund manager to generate positive returns in both rising and falling equity markets.
Hedge funds were once considered an investment vehicle exclusively for the wealthy, however, over time they have evolved to be a tool utilised by a wide range of institutional investors, non-profit organisations, and superannuation funds to help manage investment risk, diversify portfolios and produce reliable returns[3].
A hedge fund manager can employ aggressive tactics in a wide range of funds (depending on the strategy of your hedge fund), using almost all the tools at their disposal to create financial gain for the fund and its investors. This can include taking long or short positions, use equity, debt and derivatives to make money in rising and falling markets. Funds can take advantage of events, company mergers/acquisitions or event global macro strategies looking at the world economy as a whole.
To become actively involved in a hedge fund, you need to be classed as a ‘sophisticated investor’ and this position needs to be signed off and verified by your accountant[4]. To qualify as a sophisticated investor, you must have it certified by your accountant that you have earned an income of $250,000 or more per annum for the last two years or hold net assets of at least $2.5 million[5].
If you qualify as a sophisticated investor and you are thinking about investing into a hedge fund, the first step is to speak with your financial planner or broker so you can identify a fund that meets your personal investment criteria and strategy and then seek independent advice to determine if the fund is right for you.
Remembering that fund managers can leverage debt in an attempt to grow the fund using derivatives and CFD’s, which could leave you not only losing money but sustaining greater losses. With this in mind, it is always important to see proper advice before investing.
[1] https://www.investopedia.com/articles/investing/102113/what-are-hedge-funds.asp
[2] http://www.hedgefundmarketing.org/difference-mutual-fund-hedge-fund/
[3] https://www.managedfunds.org/wp-content/uploads/2016/06/06.09.16-Benefits-of-HF-Investing.pdf
[4] https://asic.gov.au/regulatory-resources/financial-services/financial-product-disclosure/certificates-issued-by-a-qualified-accountant/
[5] https://www.sophisticatedaccess.com.au/what-is-a-sophisticated-investor/
