January 04, 2007
Read This Before You Invest
Are you wealthy enough to put aside a sizeable amount to ride the hedge fund wave? Well, then you probably want to invest in hedge funds. Before you take the decision to invest, there are a few things you need to know.
For instance, it is very important to know about the manager of the hedge fund you want to invest in. You must learn about the credentials and experience of the fund’s founders and principals. You don’t want to get stuck with a fund that sinks thanks to the inexperience or greed of your fund manager do you?
Next, try to understand the level of risk involved in the fund’s investment strategy. There are a wide variety of investment strategies available to hedge funds today. The risks corresponding to each strategy vary greatly and hence it is important for you to understand the aggressive or conservative nature of your fund’s strategy. This will help you determine if it meets your investing goals and tolerance for risk. Find out if your hedge fund manager follows any set of standards and a code of conduct.
Next, check the fee structure and how much of the money goes to the manager. Most hedge funds charge a management fee of around two percent and a performance-based fee of 20 percent. The fee structure for fund-of-funds is different.
One thing you must realize is that unlike mutual funds, hedge funds are more of illiquid assets. This means that while mutual funds can be bought and sold with relative ease, hedge funds limit the opportunities to cash in shares. They may also impose a lockout period during which time you may not be allowed to redeem your shares after an initial investment.
And the most important thing you must determine is if hedge funds fit in with your investment strategy and long-term growth plans. This means you must fully understand the structure and attributes of the vehicle in which you plan to invest.
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