Barclays - Educational

Invest Hedge Fund - Basics Of Investing In A Hedge Fund

Written by Chahn | Feb 1, 2012 6:30:00 AM

If you are looking for an investment alternative to the US stock market (compound annual return of -0.18% since January 2000) and already have quite a bit of money to invest, you may want to consider hedge funds. Mutual funds offer returns that are pretty much inline with the overall market averages, but hedge funds offer something on a whole different level. Hedge funds are a lot more aggressive and are allowed to take certain liberties that mutual funds or other managed funds are not allowed to take. Because of this, compound annual returns for successful hedge funds can be significantly greater.

How do you invest hedge fund money though? If you have $5,000 in a retail trading account and are looking to invest with the big boys, you are pretty much out of luck. To invest hedge fund money, you have to be something called an accredited investor. In simple terms, you have to already be somewhat wealthy. You need to have a net worth over $1 million, or your previous two years income must have been higher than $200,000, and you must expect to make the same in the future. If you meet these specifications, you are eligible to invest hedge fund money.

Hedge funds are also different than other financial instruments in the sense that once you invest, you can't just call up a hedge fund administrator and ask for your money back when times get tough. When you initially invest hedge fund money, you will be presented with the terms and conditions of your investment, and all of these details will be laid out there. Something like this should not deter you from investing money in a hedge fund - that's just the way the business works. If everyone wanted to cash out when they started losing, a snowball effect would happen which would cause even more chaos.

Finally, hedge funds are not allowed to advertise like a standard mutual fund. Since the vast majority of hedge funds operate as private investment partnerships in the US, they are not permitted to engage in general solicitations and cannot advertise in the standard ways. But, as long as you are an accredited investor, you can invest hedge fund money with relative ease. There are databases of hedge funds available, ask one of your wealthy friends who they invest with, or contact your broker.

If you have already been relatively successful in your chosen career and have accumulated an amount of wealth that qualifies you as an accredited investor, you may want to consider whether hedge funds can offer you a way to grow your money even further.