How to Invest in Hedge Funds: A Guide for Beginners

Don’t hedge your bets on hedge funds. There are more than 11,000 funds operating all around the world. They contain billions of dollars in assets, and they create very high rates of return. 

If you’re looking to make a lot of money, you should consider investing in a hedge fund. But you shouldn’t just wire money into one. 

Hedge funds are complicated and exclusive entities. You need to know the basics of what a fund is and how it operates. Then you can learn the steps you can take to make money. 

Start learning here. Here is a guide for beginners on the operations of a hedge fund. 

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What Is a Hedge Fund? 

A hedge fund is a specialized investment structure. Many different investors pool their money in the fund, and they receive returns from it. 

The fund is often structured as a limited liability company. This allows investors to be partners in investment operations. They help decide where their money goes to, and they can pull their money out if they don’t like one operation. 

How Do Hedge Funds Work? 

Each hedge fund is different, but there are some common traits among them. Most operate using aggressive investment tactics, like short-selling. This allows investors to earn lots of money quickly, though it can backfire in weak markets. 

Many funds participate in private equity. They buy privately-owned businesses, and take them over, offering shares to investors. Others specialize in real estate, flipping properties, and investing in urban development. 

You may find hedge fund strategies that focus on specialized assets. A few buy and sell works of art, while others acquire patents. 

What Are the Regulations for Funds? 

You might think that the SEC provides close regulations for hedge funds. That isn’t entirely true. 

SEC Regulation D does impose a limit on how many investors can operate in a fund. The regulation also dictates that the fund must answer questions put to them by investors. 

But managers do not have to register their fund with the SEC, as long as they follow the rules. They can engage in more complicated investment strategies than mutual funds. 

Who Is a Hedge Fund Manager? 

As the name suggests, a hedge fund manager is the overseer of the hedge fund. They work full-time on it. They make decisions every day on how to invest and they speak with a lot of clients.

Nearly all managers have a unique strategy. They may specialize in real estate, or they may push on long-term investments over short ones. 

To compensate for the manager’s work, investors pay a performance fee to them. This is often a share of the fund’s profits, which can be as high as a twenty-percent take. 

Managers are required to make their disciplinary history and investment strategy public. You can check out any manager’s information on the SEC’s website. 

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What Are the First Steps of Hedge Fund Investing? 

Before you can even think about investing in a fund, you need to become an accredited investor. You must have an annual income over 200,000 dollars or a net worth exceeding one million dollars. 

Once you have accreditation, you should start talking to different managers. Since each one has their own specialty, you need to talk to many different individuals.

Sit down with them and listen to what their strategy is. Ask them questions about their experience, including with new clients. Find someone who has a style of investing you believe in and a personality you are compatible with. 

You will need to invest a significant amount of money, usually several hundred thousand dollars. After your money goes to your manager, it falls under a lock-up period. You cannot make any redemption until a year passes. 

You should also keep in mind that you will have to pay fees to your manager. These fees go on top of the amount you are investing. If you are unwilling to pay high fees or wait a lock-up period, you should not invest in a hedge fund.

What Are the Next Steps? 

You should not forget about your money once it goes to your manager. Have a conversation with them at least once per month. Touch base with how things are going and what new strategies they can take. 

Diversify your investments in your fund. Place a little money in stocks, real estate, and hard assets. This gives you multiple revenue streams and protects you from a market crash. 

You should do the same in your other investments. Spread your wealth across several different mutual and hedge funds. If a long-term strategy works better for you than a short-term one, find funds with that kind of approach.

If a market crash happens, do not panic. Talk to your manager and financial advisor about what your next steps are. You can pull your money out after the lock-up period, but you should try to maintain investments somewhere. 

Put Your Money to Work 

Hedge funds are high-risk, high-reward. They take a pool of money from investors and put it into aggressive strategies, including buying private companies. The SEC allows them to operate unregistered, though they must be limited to a small pool of investors. 

A hedge fund manager adopts a unique investment strategy. After you get SEC accreditation, you should meet with a number of managers. 

Get involved in your financial portfolio. Diversify your assets in the fund, and invest in several different funds. 

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