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Tip of the Day Index Funds are Your Friend

Index Funds are Your Friend - Every stock market or stock exchange offers indexed funds and these index funds are more beneficial to you as a new investor as they...

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Hedge Funds

If you were to sit down with a list of all the mutual funds in the US and count them one-by-one, it'd take forever. That's because there are close to 12,000 mutual funds. However, that doesn't account for the number of hedge funds, which could greatly increase that number.

A hedge fund is a privately-managed investment fund that is basically like a mutual fund in the sense that it pools people's money in order to diversify. However, there are quite a few notable differences between the two.One difference can be seen in the minimum initial investments. With a regular mutual fund, you can often get started with $2500 or less. With hedge funds, you're usually required to start with as much as $25k, $50k, $100k, or sometimes even $1 million! Hedge funds are usually restricted to the affluent so they usually aren't even considered by average investors.

"Mutual funds have as many regulations as a marine in bootcamp." That is a popular saying among investment professionals because funds have to abide by rules that the SEC sets. The SEC regulates mutual funds so they are often restricted in their investments. Hedge funds don't have this problem because they aren't currently regulated by the SEC. They are free to invest in other forms of speculative investments such as options and futures. They are also able to take advantage of short selling and buying on margin to increase the fund's performance.Hedge fund shareholders get hurt in the pocketbook when it comes to calculating the fees. Although the management fee is relatively small, 1-2% on average, the fund usually takes the first 20% in profits to keep for themselves. This means that the fund must earn a much higher return than a mutual fund to make it worth the fees.Despite the high fees and high minimum investments, hedge funds aren't necessarily bad. In fact, I might even say that they are good investments for certain people. For example, if you have a large amount of money saved and your portfolio is pretty conservative, it might not be a bad idea to put a small percentage in a riskier investment such as a hedge fund. Of course, that's considering you've done the proper research with the available information.

 

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