Hedge Fund Reader : The basics that you need to know before investing in hedge funds

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March 14, 2006

The basics that you need to know before investing in hedge funds

Are you investing in hedge funds for the first time? Well, make sure that you garner the basic information that is necessary and can affect the future of your investment, before you select the hedge funds.

In case of most hedge funds there is a proper prospectus or a memorandum, go through these in detail. Understand the investment strategies of the fund that you are planning to invest in and the risks that arise from these strategies. These strategies and risks should be in tune with your personal investing goals.

Also, remember that like all other investment tools, even in the case of hedge funds, the potential returns are proportional to the risk factor. In simpler terms, the higher the potential returns, the higher is the risk factor.

Next, you would have to make an effort to understand how the funds assets are valued. It might pose a problem to value the securities that the funds of hedge funds and hedge funds invest in, but at the same time you cannot ignore this.

Make it a point to clearly ask the manager the fee structure for the hedge fund. The fees can have a significant impact on your returns. In case of most hedge funds, you would need to pay an asset management fee of 1-2 per cent of assets, along with a performance fee. The performance fee is usually 20 per cent of the profits that arise from the hedge fund.

A hedge fund might also have certain limitations in terms of redeeming your shares, make it a point to clarify any doubts about this in the very beginning.

Last but not the least, research the background of your hedge fund manager before investing your money. With these points taken care off, your basic research is more or less in place. Just remember that it pays to be careful.

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March 14, 2006 in Research | Permalink