Many investors have heard of the hedge fund concept, but may not understand how it could work for them. Both novice and experienced investors may not be confident enough to try it out. But they could also stand to benefit if they were able to understand just a few of the basics. It can be a great tool to incorporate within your portfolio if you know what to look for during trading.
Many people have been able to reap considerable amounts of rewards from the hedge funds they have helped to create. Be aware that it may be much different than the other types of investments you may have made. It can take quite a bit more of your time, but it may likely be worth it.
Basics of the hedge model
The first thing to realize about a hedge fund is that they typically are not open to just any investors out on the market. With stocks and bonds, anyone can open an account if they purchase these options through a company. Hedge funds are quite different because they are a limited partnership model of investment. Only a select few participants will be allowed to enter into an agreement with this fund. This limitation allows the hedge fund members greater amount of control over the way their money is utilized. It also increases the amount of risk per investor that chooses to participate in the fund.
What to expect from your fund
That being said, they are usually one of the most lucrative options that are out on the market. The reason is that most hedge fund managers are driven to achieve absolute returns year after year. This means that the fund strives to generate positive revenue for the investors, despite the general performance of the market.
Even if the market is undergoing a downturn, the hedge fund managers are expected to produce some kind of profit for the participants. This was sorely challenged during the most recent economic downturn, but the popularity of this investment method has remained high. Many changes were made to the hedge fund programs to make them less speculative. This has restored a lot of faith people may have lost during the recessionary years.
Future of the hedge model
In the years since the economic downturn of 2008, the general interest in hedge funds has continued to grow. A recent estimate predicted that hedge funds will be comprised of over $2 trillion of total worth throughout the 2012 year.
There have been some recent government regulations added, which will restrict the way that people can access hedge fund programs. You will now need to be classified as a particular kind of investor if you want to get access to these funds. You may have to be considered an accredited investor or a qualified investor by a company. This will let you play a more active role in the way that a hedge fund has been created.
Finally, you will want to know that you can withdraw or add money at any time through most of these hedge fund programs. They have an open access policy that encourages investors to move freely. This will make most of the hedge models out there performance driven. You may want to dip your toes into this lucrative sector of the marketplace.
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Mike is a professional investor who has years of experience in dealing with hedge funds. He is also a freelance business and finance writer.