The strength of a hedge fund is in its power as a collective investment vehicle. That is, investing in this type of fund will frequently involve a strategy of spreading one's position in many different market sectors and levels of risk. By creating such a balance, more stability is achieved.
Additionally, such a fund is generally managed by a private investment company. The benefit here is that the fund manager will only profit should the position increase in value. Therefore, there is a great deal of motivation for the position to perform well. It should be noted that fund managers are highly knowledgeable and skilled in how to invest properly.
This type of position will frequently offer a guaranteed minimum rate of growth per year. This is one of the main reasons why they are often used in conjunction with a pension fund or other options offered by the banking community.
To briefly review, some of the benefits of a hedge are:
- Less risk due to investment diversity.
- Professional management by trained investors.
- A minimum level of growth with the potential for additional returns.
In principle, a hedge fund is an excellent way to accrue wealth over time. Nonetheless, there are some pitfalls to avoid and certain variables to examine. The first step is to make certain that the company that will be investing has a proven track record. They should be well known within their field and not only should they provide testimonials, but they should offer examples of past performance.
Another variable that will affect overall performance is the amount of minimum growth expected each year. As fund managers will generally only take a commission above a certain amount, this level needs to be established up front. While a fund may offer a return of thirty percent, it needs to be remembered that this may not reflect fund manager commissions and broker fees. A fund offering a return of fifteen percent or more per year after these deductions is considered healthy.
The amount of money that needs to be deposited is crucial to determine. Unlike a position in a private equity, there are minimum levels that are required to enter into this fund. This may prove troublesome for those who do not have the capital to enjoy the aforementioned returns.
Finally, the sectors that are being invested in also need to be examined. Is there a healthy balance between short and long-term positions? Are the risks involved managed properly? Are precious metals involved? How much of the platform is reliant on profit from volatile areas such as currency trading? These are some of the questions that will be asked.
Once again, variables to consider include:
- The reputation of the company,
- The expected rate of growth and minimum yields.
- The entry level.
- The composition of the portfolio itself.