Hedge funds: what makes them popular in the investment world?
What are hedge funds? What is its role? How does it work? The first thing to remember is that a hedge fund is not a single type of investment, but rather a combined investment structure that is set up by the hedge fund manager, usually a partnership or limited company. The term “hedge fund” describes this structure and the investments within it.
The manager launches a new hedge fund with the aim of raising capital. If they have a good track record, investors will allocate capital to the hedge fund.
Once the principal has sufficient launch capital, usually between $5 million and $25 million, it will be invested in a range of assets. The manager will look at the market and buy investments that are expected to increase in value over time, thus making profits for the investors. for investors. All hedge funds seek “alpha”, which is a return that exceeds what the market is returning. Many of them also use trading strategies, such as leverage and risk management using derivatives.
The types of hedge funds determine the type of investments the manager makes. Some hedge funds allow investing in assets that are expected to rise in value, while others allow the possibility of investing in both assets that are expected to rise and that may fall.
How do hedge fund managers make money?
Hedge fund managers can make a lot of money, but that only happens if they make a profit. The standard hedge fund structure is called “2 and 20”. This means that the manager gets paid 2% of the total assets he manages and 20% of the profits he makes.
This means that it can be profitable for good managers, but at the same time it may carry a lot of personal risk for them if things do not go according to plans.
Can you invest in a hedge fund?
Most hedge funds allow individuals and companies with high net worth to invest in them, such as pension funds, investment banks, and asset managers. Investors in hedge funds must also be either “accredited investors” and/or “sophisticated investors” due to the risks involved.
What makes hedge funds popular?
Hedge funds do not have a good reputation, there have been a lot of scandals in this sector. As with soccer players or movie stars, hedge fund managers have made a lot of money in recent decades. There is nothing wrong with legally acquired wealth, but the problem with hedge funds is that often this money is made at the expense of other people’s loss.
Because hedge funds can “go short,” they make money even if markets slump and economies falter. In the 2008 crisis, for example, some hedge funds made huge amounts of money. This makes it seem detached from the wealth of the daily economy.
But this is not the hedge fund manager’s fault, he is also risking a lot. In addition, many of the world’s highest-paid hedge fund managers, such as Ray Dalio and George Soros, come from younger backgrounds.
What are the alternatives to investing in a hedge fund?
As mentioned earlier, most people cannot invest in hedge funds because they are only for high net worth investors or institutions. But there are two alternatives to hedge funds that the general public can invest in:
Exchange Traded Funds (ETFs)
ETFs allow investors to place their money in any sector of the stock market without having to pick and choose each individual stock. These funds can give you exposure to a variety of asset classes at a low cost and no buying and selling fees.
Android advisors
Robo-advisors are all about investing for you. All you need to do is register with a robot advisor and choose a strategy in which to invest your money in a wide range of investments. Robo-advisors usually have lower fees than hedge funds because there are fewer costs in running the business, and they also don’t have to pay a hedge fund manager bonus to begin with.
summary
So, is investing in a hedge fund the right option for you? The answer is almost certain: no. Unfortunately, you are unlikely to have the necessary level of experience to invest in these assets. It is also worth remembering that the performance of hedge funds is nothing special. There is a famous story about legendary investor Warren Buffett, who bet a million dollars a decade ago that investing money in an index fund would yield a higher return than a hedge fund manager, and won the bet so that the S&P 500 index fund he invested in, gained 126% over ten years. , while the five hedge funds he faced added only 36% on average.
Hedge funds are not only expensive and hard to access, but they are also not great when it comes to performance, so we think it is best to avoid them.
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