Even with the market in the doldrums, there are more multi-millionaires around today than there have been in decades. And with the proliferation in the number of seven- and eight-figure folks comes an interest in other types of investment vehicles, like hedge funds.
If there's one thing you absolutely positively have to know about hedge funds before ever thinking of investing in them it's this: Hedge funds are not the same as mutual funds. There are many differences between the two with the most important being they are private placement investments. As such, they are not registered with the Securities and Exchange Commission and don't have to follow the rules and regulations set forth by the The Investment Company Act of 1940 as mutual funds all must. As a result, there aren't the layers of rules and regulations imposed on hedge funds as they are on mutual funds.
Richard Bookbinder is the general partner and portfolio manager of The Roebling Fund, (212-332-2840). It is a fund of funds hedge fund. Assets invested in it are currently divvied up into 10 different hedge funds--all with different managers utilizing various investment strategies.
Bookbinder has been in the securities industry since the 1970's beginning his career in the municipal market at J. B. Hanauer. He also enjoys talking about the differences between hedge funds and mutual funds. Here's more about some of those differences:
Q: Who are hedge funds for?
Bookbinder: Accredited investors and accredited investors only.That means you've got to have income, whether it's single or joint, between $200-$300,000 a year and assets of a $1.5 million or more.
It's estimated that there are over a half a million people with assets totally over $5 million, and that's the targeted market.
About 80 percent of the hedge fund market is high net worth people, the other 20 percent, institutional investors. And generally, between 10 to 20 percent of the overall investments in the high net worth and institutional market will go into the world of non-traditional assets. Or alternative asset classes, and that's where hedge funds, private equity and venture capital come in.
Q: What's "hedge" mean from an investment point of view?
Bookbinder: In a mutual fund, portfolio managers can typically only go long securities. ( "Long" means one buys a security and holds it.) A hedge fund manager has the ability to hedge a long position with a short position. (In a short position, portfolio managers sell stocks they don't own.)
So what a good hedge fund manager will do is they will be long stocks of companies that they like and they will be short companies they think the stock price will go down on.
Q: Then hedge means that a manager is trying to pick winning winning stocks and winning losing stocks?
Bookbinder: That's correct. The manager is hedging to protect the long position and hoping that the long position will go up in price and by shorting a number of stocks, that they will go down in price. And if he's right, he'll make money in both cases.
But that's not the only strategy they can use. Hedge fund portfolio managers can also use leverage or invest in things like convertible arbitrage and merger arbitrage.
Q: How easy is it to get your money out of hedge fund?
Bookbinder: In a mutual fund you basically have daily liquidity and redemption is in essence daily. In hedge funds, because they are limited partnerships, generally speaking liquidity is annual. So you are locking your money in.
You will get monthly, quarterly and annual capital account statements to see what the value is, but the money you invest isn't as liquid as it would be if invested in a mutual fund.
Q: What about following their performance?
Bookbinder: Good question. According to market estimates, there are about 4000 hedge funds around with assets totaling about $400 billion.But there isn't one source that tracks and publishes their performances.
In the end, if you're considering an alternative assset class investment like a hedge fund, keep in mind that there are plenty of risks involved that you won't find in mutual fund investments. So make sure to do plenty of research.
Hedge funds and mutual funds are not cut from the same cloth. Here's a look at some of their differences.
|MUTUAL FUNDS||HEDGE FUNDS|
|SEC registered with unlimited number of investors||Private Investment Partnership limited to 99 investors|
|Limited use of leverage, short selling, and derivatives||Ability to use leverage, short selling and derivatives|
|Small minimum initial investments required (typically $250)||High minimum initial investments ($500,000 dollars and up)|
|Extensive use of advertising and promotion||Prohibited from advertising and promotion|
|Offered by prospectus||Offered by private placement memorandum|
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