Hedge funds are a great way for investors to grow their wealth. These amazingly rewarding financial structures, however, are not known to many and are out of the reach of the majority of retail investors. Nonetheless, if you are planning on diversifying your investment portfolio with the help of a hedge fund, we’ve got you covered. To know more, read on –
What exactly are hedge funds?
Private funds that use complex strategies to invest and produce relatively higher returns compared to their public counterparts such as mutual funds, are called hedge funds. These privatized funds have access to a wide range of investment tools like derivatives and leverage that generally are not available to traditional mutual funds. Hedge funds require millions in investment just to get started and even charge a higher commission. However, this expenditure still falls within the budget as the returns offered are equally huge.
Hedge fund managers are capable of providing results that constantly beat the market as they are selected to lead the fund only after they have built a track record proving the same.
Why are hedge funds one of the most sought-after financial assets in the world today?
Investing in hedge funds has a lot of benefits and to enlighten you about the same, here are 2 mains reasons as to why hedge funds are so popular -
- They offer portfolio diversification - A private hedge fund tends to stay away from public markets and any other financial assets that are affected by the price movements of the same. This allows you to keep your investment diversified by including assets that are generally not available to funds like mutual funds.
- They give you more chances of profit- Hedge funds have more freedom when it comes to making riskier investment decisions. This allows them to use various investment strategies like using leverage or investing in derivative contracts to increase their profits and cut down on the potential of loss.
What should you keep in mind when looking to add hedge funds to your list of investments?
Though hedge funds are amazing money-making financial assets, here 2 things you need to be aware of before you decide to invest in a hedge fund -
- They are not very liquid - A private hedge fund generally has a lock-up period within which you are not allowed to withdraw your investment. This should not be an issue if you have your finances covered in the case of an emergency. However, if that is not the case, do keep in mind to check the rules and duration of the lock-up period before investing in a hedge fund.
- No oversight on your capital usage - Apart from choosing the type of investment strategy, you do not get much control over how and where your capital is being used. Hedge funds unlike their public counterparts are not required to report anything by the law and thus to avoid losing their competitive advantage, hedge fund managers are very reluctant when it comes to providing any investment details to anyone other than their own staff.
We hope this article has cleared any doubts that you might have in regards to hedge funds.
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