Hedge Funds, they're hot and garnering interest
Hedge funds. Odds are, you've heard those words a million times and always figured that they were the kind of investment only the very wealthy were privy too. Well, now that's beginning to change so don't be surprised if sometime in the not so distant future your broker, investment advisor or financial planner offers them to you as an asset class alternative investment. But before forking over any cash, the first thing you've got to know about hedge funds is that they're not mutual funds.
Hedge funds, like mutual funds, are pooled asset investments. But unlike mutual funds, they don't have to be registered with the SEC, although today about 10 percent of them today are. Nor, are they regulated under the guidelines of the Investment Company Act of 1940 that regulates the structure and operation of mutual funds.
Created for "accredited investors", i.e., individuals with a net worth in access of $1 million and an income of $200,000 for the past two years, the popularly of hedge funds has soared over the past few years just as the number of millionaires has grown. And, the need to make --or preserve--- money in a sloppy market has.
"Ten years ago, there were about 600 hedge funds worldwide. It was a small universe and we knew virtually everybody out there who were running hedge funds, " says James Hedges, IV, president of LJH Global Investments, a hedge fund advisory services firm coated in Naples, Fl. "At that time, we were investing in four or five different strategies so the ability to generalized about hedge funds was quite high. Today, there are over 6000 hedge funds investing over $600 billion dollars and the number of strategies is north of 15."
While each hedge fund is different and can be managed in various ways, from long/short investment strategies that invest in stocks or bonds, to distress funds made up of securities in trouble, or fund of funds--pools of multi-managed funds-- their performance history is what attracts the crowds. Last year, for instance, the Wall Street Journal reports that the average hedge fund was up 4 percent while the S & P 500 was down 13 percent. And, according to Van Hedge Fund Advisors, over the past two years, the average equity U.S. hedge fund gained 17.2 percent while the average equity mutual funds lost 17.1 percent.
Hoping to appeal to a broader audience, Hedges' group, LJH Global Investments, has partnered with Phoenix Investments Partners and plans to bring a closed-end fund to market later this year. The investment strategy it will employ with be a fund of funds one. With its introduction will come more regulations (because closed-end funds are investment companies and thus registered and regulated investments) and considerably lower minimum investment requirements.
But before cashing in your CDs or borrowing for your 401(k), keep in mind that just as with every other investment in the whole wide world, there are risks associated with hedge fund investing. And, even though the risks will vary from the type of investment strategy used, it always exists.
If, however, there has ever been a investment risk statement that's worth reading--- and remembering---whether you're a mutual fund investor or a hedge fund investor, it's the one Global Partners Asset Management includes on their web site, www.gpfunds.com . It reads: "You should be aware of the risks associated with equity investments. Please remember that past performance is not necessarily a guide to the future. Market and currency movements may cause the value of investments and the current income from them to fall as well as rise, and you may get back less than you invested when you decide to sell your investments. Be aware that smaller markets can be more volatile than developed stock markets and can carry more risk. Independent financial advice should be taken before entering into any financial transaction."
Amen to that.
To learn more about hedge fund investing, here are a few web sites worth visiting: www.ljh.com; www.hedgefundworld.com; www.hfr.com; and www.managedinvestments.com.
Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.
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