What are Hedge Funds Invested in?

If you fancy yourself sophisticated in all levels of life, and you have the financial resources to back up your rich tastes, then you may be able to participate in a hedge fund.

What are hedge funds?

Hedge funds are a type investment where the investment instrument is set up and managed in a way to offset potential losses in the main markets. They are extremely high risk investments not for the faint of heart, especially since it is not mandatory to register a hedge fund with the U.S. Securities and Exchange Commission.  Hedge funds manage to dodge that process since they are generally issued as “private offerings,”  thus providing them with different rules than other types of collective investment schemes.

What’s in a hedge fund?

According to New York Magazine , “It’s hard to say what really goes on inside any hedge fund.”  Like other collective investment schemes, hedge funds contain a mixed-bag of debt, shares, commodities and other investment instruments. Each hedge fund is unique and follows its own path which dictates the types of investments that are included in the fund.

Alfred Winslow Jones launched the first “hedged fund” in 1949, as a way to generate profit with minimal risks. However, because of the pay structure for the investment manager, hedge funds are a risky investment. Hedge fund managers get paid a performance fee based on the profits made, the bigger the profit, the more money they will get paid. Because of the temptation, they may take more risks with the investment money in order to achieve bigger gains.

Building Wealth

The only way to determine what exactly hedge funds are invested in is by requesting the prospectus for a particular fund. In that document, the composition of that particular hedge fund along with its history, fees and other important investment facts will be listed.

About the Author

GOBankingRates Staff

These articles are written by the in-house GOBankingRates team.

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