Hedge funds are professional managed investment portfolios. They are normally open to a specific class of investors, usually wealthy and highly sophisticated. Just as the name implies, a hedge fund will hedge risks by offsetting the potential losses through investment hedging with the use of various approaches. Short selling is one of the most popular that is used now.
What is interesting is that in modern times, the term “hedge fund” will be used to describe some funds that are not hedging risks. They increase risk because they expect a much higher ROI will be generated. Greg Lindae is a specialist in this and does share some extra facts people need to know about hedge funds.
A Highly Niched Approach
The mutual funds are going to invest in specific sectors, like IT or technology. Alternatively, they will use a specific approach, like the small-cap growth. Determining how good the mutual fund is and how it performs is based on returns as they are compared with one of the market benchmarks, like the Russell Financials 1000 index. The hedge funds will look for positive absolute returns. It does not matter how the performance of a sector is or what market benchmarks say.
The Regulation Problem
Hedge funds are constantly criticized. This usually happens because people are not actually aware of what they are or how they work. The constant complaint is that hedge funds are mostly unregulated or that regulations are too light. You can clearly see when comparing to the mutual funds as they are regulated through the 1940 Investment Company Act.
The reason why hedge funds do not fall into the category covered by the mentioned act is that they are participating in private offerings and work with investors alone, as opposed to the mutual funds’ public offerings. A hedge fund does not even have to register with the Securities Exchange Act. However, because of the fact that hedge funds evolved so fast, the SEC did have to start studying the business entities. Brand new rules were adopted for the hedge funds that were dealing with over $25 million in registered assets. However, if funds held to investors for a minimum of two years, this is not a necessity.
The Financial Crisis
During the 2008-2009 financial crisis, hedge funds came into the attention of the public, mainly because of the short selling practice involved in financial stocks. Most of the financial media actually mentioned that the crisis was deepening much faster than expected because of the practice of the hedge funds.
Are Hedge Funds A Good Idea For You?
At the end of the day, this is the most important thing for most people. No matter how we look at it, the track record of most hedge funds is really good. The only problem is that it is not easy for many to get in. There are some strict requirements, especially in terms of how much money needs to be invested. However, if this is not a problem, it is something that has to be taken into account.