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.