Thursday, April 27, 2006

Investing in Hedge Funds

Investing in Hedge Funds

Hedge funds are not mutual funds, they are a significantly different animal. A hedge fund is a fund the applies a defensive management of your investments. There are significant differences between a hedge fund and mutual fund. Wikipedia defines a hedge fund as follows: A hedge fund generally refers to a lightly regulated private investment fund, often a partnership rather than a corporation in form, and characterized by unconventional strategies (e.g., strategies other than investing long only in bonds, equities or money markets).
The term hedge fund dates back to the first such fund founded by Alfred Winslow Jones in 1949. Jones' innovation was to sell short some stocks while buying others, thus some of the market risk was hedged. While most of today's hedge funds still trade stocks both long and short, many do not trade stocks at all.Let take a look at some of the differences.

  1. First of all a Mutual Fund is regulated by the SEC a hedge fund is a private investment vehicles and is not regulated by the SEC.
  2. Mutual funds allow a Minimum Investment that is usually small and obtainable by most investors. Hedge funds require a large minimum investment which averages about $1 million.
  3. In a mutual fund the number of investors is not limited however, in a hedge fund you are limited to 499 investors or "limited partners" who can invest in any one fund.
  4. Mutual funds are available to the general public unlike hedge funds where you are required to have a certain net worth or income requirement.
  5. Mutual funds have a high level of liquidity and shares can be redeem daily, hedge funds redemptions varies from monthly to annually.
  6. Mutual funds are limited to 30% of profits from short sales with hedge funds this is not limited.

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