Investing in Hedge Funds Risks. They say gedge funds are for suckers. Let’s take a look at this type of investment to define its pros and cons. Hedge funds have been known worldwide for years. The best advertisement for them are their investment results so that more and more people take an interest in this form of investing. Like many new financial products, hedge funds in the initial period were available only for a few. The chosen ones were usually wealthy private banking clients. Over time, interest in this form of investment has become so large that hedge funds have been offered to a wide range of clients. The origins of the hedge funds date back to the fifties. Then the first specialized institutions offered transactions that could hedge investors against fluctuations. The father of hedge funds was Alfred Winslow Jones. He used, so called, short sale which means selling borrowed securities and using financial leverage (use to pay only a portion of the required amount) which was a kind of revolution. Currently, the two concepts established themselves in the financial vocabulary and it’s difficult to even imagine today’s Forex market without leverage. Many say that when investing in hedge funds risks are the same. You can say that hedge funds were created as a response to specific market needs.
Investors many years ago felt the need to use such a financial product that will make money not only during the good times in the stock market, but also during the opposite. Hedge funds are growing in strength today. Particularly dynamic development of this form of investment could be observed in the last few years. Currently, the value of the assets they manage reaches about $ 1,000,000,000,000.
Benefits of Hedge Funds
Large hedge funds obtain their results from the generally prevailing situation on the stock exchange market. It’s like investing in a wide variety of financial instruments: stocks, currencies, options, futures, both in the securities market and trade market. Oil, copper, gold, silver, diamonds are the most popular of raw materials that hedge funds invest in. They use so-called leverage, entering transactions with the use of a small portion of the assets. As a result, even though the big risk is taken, hedge funds can perform multiple transactions in different markets. Hedge fund managers often engage in fund their own assets, which further affects their motivation to achieve the best possible results. Hedge funds, like the classic investment funds charge different processing fees. However, what distinguishes hedge from mutual funds is collecting the management fees plus performance fee only after earning a certain profit. This is another motivation for the managers themselves.
One of the main distinguishing features, when compared to traditional investment funds, is that hedge funds often emit so called investment certificates. They are sold at specific dates, then typically go to public trading, like shares.
Investing in Hedge Funds Risks
What is the risk of investing in hedge funds? Hedge funds tend to be equated with the investments with a high degree of risk. Although the spectacular bankruptcies are rare, it can not be ruled out. Elementary operation principle of hedge funds is to engage a few percent of the assets in the investment. The iron rule that you can hear on the occasion of investing is “do not put all the eggs into one basket.” It means that you should never invest all your savings in one investment. General opinion of experts is that you should not invest more than 10-15 % of your savings in hedge funds. Possible gains may be much higher than for other available financial products, and the loss will not cause undue prejudice to the state of our investment portfolio.
In the world the number of hedge funds is estimated at around 15,000. Thus, they have become one of the fastest growing segments of the financial market. Good investment performance will convince people to this form of investment. However, you should always consider investing in hedge funds risks first. You can read more on this topic at wikipedia here and investopedia here.