Are Hedge Funds Good Investments?
A hedge fund is quite simple. With hedge funds, an investment manager manages a pool of money for certain or limited partners. These partners are often business partners or members of a wealthy family.
Hedge funds are more concentrated than other types of accounts, with the expectation of outperforming. Some classic hedge funds own only 15 ‐ 30 stocks but there is a lot of rigorous research that goes into choosing them.
The term "hedge" comes from the ability of the fund to " hedge" investments. Portfolio managers often bet against stocks as well as buy them.
Now that you know what they are, are hedge funds good investments? They may be designed to outperform on a long-term basis, but that doesn’t mean that they will necessarily be a good investment for you. Hedge funds often have the following characteristics that are less than favorable:
• They lock up your money, meaning you may not be able to get your money when you need it. Fund managers can legally lock you out for one to five years.
• They come with high fees, often charging a 2% annual fee along with 20% of all profits.
• They are quite complex. Managers may invest in anything from credit default swaps to options against livestock and more.
• Techniques are often risky. They may be designed to reduce volatility but the tools used are often risky. For example, fund managers may use a portfolio that amplifies both losses and gains.
All in all, hedge funds are not a great investment for most everyday people.
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