What is the Hedge Fund Selection Process?

The more money you have to invest, the more confusing the process might be.

On top of all the investment options available to the masses, such as mutual funds and online trading, those with substantial amounts of income can also invest in hedge funds. It is important for those interested in hedge funds to do more research because of the amount of money involved and the lack of regulation from the SEC, which can make this type of investment more risky.

Guidelines for Fund Selection

  • One rule associated with the hedge fund selection process may be considering the “absolute performance” of a hedge fund. Absolute performance examines the rate of return for the investment. However a high-yielding rate of return should not be the only point taken into consideration as past performance of any type of fund is not an indicator of the future earnings.
  • Investors may also choose to look at the mathematics of a potential hedge fund to get a peep into the past volatility of a hedge fund. By choosing a limit for a standard deviation guideline, those hedge funds that do not meet the statistical criteria can be eliminated from the investment consideration process.
  • Hedge funds should also be compared side by side with other similar funds to see how they performed historically in relationship to their nearest competitors. When following this strategy, it is important to compare “oranges to oranges” as you can get a better feel for how they are expected to perform.

A helpful tool for selecting hedge funds appropriate for your portfolio and long-term needs is setting up a spread sheet with all the comparable information loaded in for the guideline parameters you selected. Once you can view all the statistics in a clean document and make comparisons, you will get a clearer picture of the right fund for you.