Hedge Funds

Investing in hedge funds is not for the faint of heart or empty of pocket.

Hedge funds are high risk investments that do not come with the government regulations or "safety nets" that are mandatory for mutual funds and other types of collective investment schemes. This specific type of investment targeted to the most sophisticated (aka "wealthy") investors and there are even certain qualifications they must meet to allow them to invest into this type of financial instrument. Wealthy individuals looking to invest in hedge funds are required to pass either an accredited investor or a qualified purchaser test.

Who are accredited investors?

Accredited investors must pass a financial stress test in order if they qualify to invest in hedge funds. Accredited investors must have a net worth of over $1 million and have documented individual income exceeding $200,000 annually or possess assets exceeding $5 million.

Who are qualified purchasers?

The other group of individuals who can invest in hedge funds are qualified purchasers. These sophisticated individuals must either have at least $5 million in personal investments, be in a family-held business with $5 million in investments, or have a a trust amount sponsored by other qualified purchasers or a business that have at least $25 million in investments.

The overall net value of hedge funds can run into the billion-dollar range, thus only the wealthiest investors can participate. Regulators allow a broader range of trading activities, investments and risks than other types of investment instruments. Investment managers oversee hedge funds and are in the position of "short selling" frequently to help offset the potential losses in the principal markets. That act of "hedging the investments" are how hedge funds acquired their name.

From its humblest beginnings as an investment strategy published in Fortune Magazine circa 1949, hedge funds have developed into a $1 trillion international industry.

The history of hedge funds

The roots of hedge funds date back toAlfred Winslow Jones. Jones was once a sociology student working on his thesis onindustrial relations. He later developed thedissertation into a book, which was run as an article inFortune Magazine where he later became a full time employee.

In 1948, Jones wrote an article about "current investment trends" for his employer which actually inspired him get more involved in the actual act of investing. He raised about $100,000 and tried to invest in a way that would maximize gains and minimize risks. The format he used was a combination of holding long-term stock by short selling other stocks, developing the "long/short equities model."

Jones called this strategic investment combo "hedged funds."

Jones tweaked his investment instrument in 1952 and its basic structure is still intact in today's hedge funds.Jones converted the investment tool into a limited partnership arrangement. Additionally, he added a 20% performance fee as the fund manager's compensation. The hedge fund combined many methods to mitigate the possible losses including leverage, the art of short-selling, compensation based on profitability and making it a collective investment scheme.

Hedge funds today

Hedge funds do not follow the same protocol as other types of funds registered with the SEC because they are considered "private offerings" and do not have to register. Nowadays, hedge funds utilize a full range of strategies including some that do not follow conventional hedging protocol.

Despite the troubles and unethical behaviors of some hedge fund managers, the particular instrument is not going anywhere and is responsible for even launching its own offshoot (fund of funds).The average investor is generally priced out of hedge fund investments as it is common that the fee to participate can range into the hundred of thousand dollar range.

However, funds of funds (an investment fund focusing on hedge funds) can be entered at the $25,000 range.

A hedge fund is an investment vehicle which is only open to a limited range of investors, and is considered riskier than your average mutual fund . Unlike a mutual fund, which tends to limit itself to buying stocks and bonds, hedge funds tend to diversify over a broader range of investments...

Stocks, bonds , hedge funds and money market investments are all different opportunities for people to invest their money in order to make it grow. Each investment is unique, with different ways of earning income, a variety of risk factors, and an assortment of finite points that investors need...