The Problem With Hedge Funds
Are hedge funds a suitable investment for you? Hedge funds are an appropriate investment for qualified purchasers with a net worth above one million dollars and an annual income exceeding two hundred and fifty thousand dollars. Purchasers are often required to sign an acknowledgement confirming their qualifications to invest in hedge funds. However, just because one is qualified to invest in a hedge fund doesn't necessarily mean they should do so. There is a major problem with this type of investment. Oftentimes, the risk associated with the fund is misrepresented, leading to investors being misguided into skewing their qualifications.
The term "hedge fund" is a generic term used to describe many unique investments. Put simply, the phrase is derived from the purpose - hedging the risk of investing. Hedge funds provide lower long-term returns in exchange for less volatility. The form of investment is not new, but their popularity certainly is. The newfound popularity of hedge funds has left many investors wondering what they are all about.
To shed a little light on a decidedly illusive investment tool, a quick run down is necessary. A hedge fund is typically a privately organized pooled investment fund, predominately invested in publicly traded securities. They are normally created as limited partnerships, consisting of one general partner and up to one hundred limited partners. The general partner usually receives a management fee and 10-20% of the profits from the fund. The success or failure of a hedge fund is often dependant on the competency of the fund manager, since they are more aggressively managed and traded than traditional mutual funds.
It should be noted that hedge funds have a higher failure rate than traditional funds. Numerous hedge funds fail by the second or third year of operation. Also, hedge funds are less transparent than traditional funds because some hedge fund managers do not reveal the securities they hold, or the extent to which they are leveraged. Hedge funds may have a higher turnover rate and be less tax efficient than traditional funds.
Along with the aforementioned downfalls associated with hedge funds, several more negatives should be noted. The management and performance incentive fees charged by the hedge fund manager, together with the trading costs and administrative fees can quickly add up, making B share mutual funds seem like a bargain. As stated earlier, only "qualified" purchasers are eligible to invest in hedge funds, leaving many would-be investors out in the cold. And liquidity, if available, is limited to quarterly release, and even then, investors are left at the mercy of the hedge fund manager.
The bottom line is, when dealing with hedge funds, get educated about your investment before jumping in. Discuss the option, both pros and cons, with your dealer, and know what you are getting into.
For more information on hedge funds and hedge fund attorneys, please click here.
More Resources
Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 404, exitingMore Stocks & Mutual Funds Information:
Related Articles
More Window Dressing
Two weeks ago I wrote about what the Securities and Exchange Commission was doing to regulate the mutual fund industry to help the small investor, the "poor folks". It really added up to zero.
I Love You, Warren Buffet
Sometime around 1980, can't remember exactly, there was a flight of money from many countries to Switzerland. The clock makers had so much money pouring in that the banks took interest rates to zero and even for a period of time were actually making you pay ½% interest to them to put your money in their banks.
365/7/24
What does it take to be a stock trader? It takes a total mental commitment to the task. It becomes a complete way of life.
A Triple Dipper: How to Make 3 Profits on 1 Stock Trade
This is a rather simple strategy with which I am sure a lot of seasoned traders are very familiar, possibly under some other name with which I am not familiar. I wanted to write about it because I don't see anyone talking about it anymore.
The 1% Solution
You probably know the story of Sherlock Holmes and the 7% solution. He had a drug addiction.
Trading Education: The Best of Both Worlds!
I made my very first investment in the stock market when I was ten years old. Ever since then I have been hooked! Now I check out hundreds of trades each year with the same excitement andenthusiasm, and each time try to find that one market at the right time that could dramatically create wealth.
So, What is This Stock Market Thing Anyway?
We've all heard of the stock market and probably have a general idea of what it is and how it works either from high school economics classes, television financial reports, and the countless film depictions of what happens on the floor of the New York Stock Exchange. But how does it really work and what is meant by "playing the stock market?"The Stock Market in a NutshellCompanies sell shares of stock as a means of raising capital.
Bull or Bear?
Cat or dog? Maybe Zebra. Shucks, I don't know, but my broker keeps telling me it is a bull and to buy this and that.
Ignore Stock Market Talking Heads
You should ignore analysts on TV, the radio, the newspaper and all other TALKING HEADS when it comes to investing! What stocks do they talk about? - The same old group, every day of every year - Why? Because they don't know any better, they are sheep like the general public, repeating what every economic textbook says and every other economist tells them to say. Everyday, the same companies are highlighted on the evening news -WHY?They aren't going anywhere.
Leverage - Margin Debt
What is leverage?Here is a definition of leverage from an online dictionary "leverage - The use of credit or borrowed funds to improve one's speculative capacity and increase the rate of return from an investment, as in buying securities on margin."Essentially, the core idea of leverage is that investors can use less money to control bigger amount of investment so that investors can make more money when the price movement is in investors' favor.
Price to Earnings Ratio - P/E
After finding the price of a particular stock, usually the next number everyone looks at is the P/E ratio.P/E is the ratio of a company's share price to its per-share earnings.
Forces that Move Stock Prices
Among the largest forces that affect stock prices are inflation, interest rates, bonds, commodities and currencies. At times the stock market suddenly reverses itself followed typically by published explanations phrased to suggest that the writer's keen observation allowed him to predict the market turn.
Stock Market Insanity
Let's first define insanity. It is doing the same thing over and over and expecting a different result.
Hot Stock Investing ... How to Pick Hot Stocks with Momentum Stock Trading
Profitable day traders recognize that momentum trading is among the fastest & most effective ways to harvest BIG piles of cash in the stock market.The problem is that if you don't know what stocks to look for and how to approach them while limiting your risk, you won't even get close to making some profits.
Complacency Indicator
If you haven't heard of the technical indicator with the stock market symbol VIX it is now time to pay some attention to it. When the number is running low, as it is now, around 15 to 18 it means everyone is happy and thinks the stock market is going to continue up or at least continue on its current path and there is no need to sell anything.
Adding Funds
Someday you may want to retire and continue to live in the life style to which you have become accustomed. According to conventional wisdom you will need less money because you will have fewer expenses than when you had to go to the office every day.
Parachute Investing
Ever jumped out of an airplane? It's OK if you have on a parachute. Pretty dumb if you don't.
Is the Stock Market for You?
Many people would like to diversify their portfolios to expand their holdings. Making it big in the stock market has been a dream for many people who want to strike it rich.
What To Buy Now
I am sure that if you have a brokerage account with a "full service" broker you have been getting calls about what to buy and sell. If you have big losses in certain stocks you might be hit with that great Wall Street lie to buy more so you can 'Dollar Cost Average'.
Intervention
Intervention. Now don't let that big word scare you.