A hedge fund is an investment fund or hedge fund, by its literal translation. It is also known as a hedge fund or hedge fund. There are many types and the common denominator of all is that the risk assumed by investing in them is quite high.
Hedge funds are investment funds that are very similar in most respects to the ones we are all familiar with. But there is a significant difference: while mutual funds are highly regulated and their managers have to comply with fairly rigid regulations, the opposite is the case with hedge funds.
In hedge funds, managers have much more freedom to make the decisions they think are best for higher returns. Inevitably, this translates into greater risk for the investor.
If you decide to invest in hedge funds, two things can happen: the move goes well or it goes wrong. As we have just explained, they are high-risk investments that are not recommended for inexperienced investors.
It is important to know that the commissions of investing in a hedge fund are quite high. Although they vary depending on the contracted instrument, they are normally around 20% of the profit. Of course, you only pay if you get benefits. It is one of the biggest attractions of this financial product.
CHARACTERISTICS OF HEDGE FUNDS
- Only Open to Accredited or Qualified Investors: Hedge fund investors must meet certain net worth requirements: generally, a net worth greater than $1 million (excluding your primary residence) or an annual income greater than $200,000 during the last two years.
- Wider investment latitude: A hedge fund’s investment universe is only limited by its mandate. A mutual fund can basically invest in anything: land, real estate, derivatives, currencies, and other alternative assets. Mutual funds, by contrast, generally have to stick to stocks or bonds.
- Fee structure: Instead of charging just an expense ratio, hedge funds charge both an expense ratio and a performance fee. The common fee structure is known as “Two and Twenty” (or “2 and 20”): a 2% asset management fee and then a 20% cut of any profit generated.
DIFFERENCES WITH A TRADITIONAL INVESTMENT FUND
Hedge funds do not usually benefit from any regulation, since as they do not have any restrictions when it comes to investing, it is difficult for them to adapt to US and EU regulations regarding investment funds.
Hedge funds can invest in a broader range of securities than mutual funds. Although many hedge funds invest in traditional securities, such as stocks, bonds, commodities and real estate, they are better known for having more sophisticated (and risky) investment policies and techniques.
Hedge funds are typically not as liquid as mutual funds, which means it’s more difficult to sell your holdings. Mutual funds have a price per share (called the net asset value) that is calculated each day, so you can sell the shares on a daily basis. Most hedge funds, by contrast, seek to generate returns over a specific period of time, called the holding period, during which investors cannot sell their shares.
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