Introduction To Hedge Funds
Investopedia defines hedge funds as “financial partnerships that use pooled and employ funds and employ different strategies to earn active returns for their investors. These funds may be managed aggressively or make use of derivatives and leverage to generate higher returns.”
There are high chances that if you are reading this article you are considering putting your funds in a hedge fund so I will mainly focus on the characteristics that you should consider before putting even a hard-earned penny in any institution.
Investments From Fund Managers
This is a great trait to consider since if there are internal investments into the pool from the fund managers then the success of you and that of the hedge fund are aligned with you. Also, fund managers would not put their money if they do not trust their abilities to trade it profitably. “Where your money is so your heart,” they say. This is just the principle that is working here. Since the fund managers also have their money in the pools, they will not manage the funds recklessly.
Get In Sync With The Fund
Make sure you understand the fund back-to-back before putting in your hard-earned money. Do not just look at the promised returns then get an adrenaline rush to give them your money. Because more often than not the hedge funds that offer high returns on capital invested expose the capital to high levels of risk as well. Make sure you understand the strategies at the hedge fund and make sure that their leverage, their risk and everything else is not beyond your risk appetite.
Know The People Who Run It
You should know the hedge fund managers and have an idea of their past records in different market conditions. You should not just invest in a hedge fund because you like their offices and all that but rather because the managers have a track record of delivering consistently.
Read Your Investment Contracts Well
You should understand how the funding and receiving of money will work and everything. You should know when you will be able to withdraw funds. This is important because some hedge funds have fund-locked periods where you cannot withdraw funds even if you desire to do so. Some also have a notice policy so you should understand all this.
You should also consider the time for which the hedge fund has been operating. This is key as it can help you picture where the firm is going based on past performances.
Hedge Fund Metrics
You should also consider some of the hedge fund metrics such as the market capitalization pending payments, total payments made so far, and so on. Such things can show you how healthy it is to invest in such a hedge fund in the time in question.
Even after checking all these things, you should know that investing in a hedge fund is still a risky business, so you should invest only money you are ready to lose and not a penny more.