Today we will conclude our look into hedge funds with our third installment showing you how to invest in hedge funds.
Today’s topic is part of our alternative investing series we will cover over the next few months.
In part one, we were introduced to hedge funds and some techniques they use to generate returns for investors. In part two, we reviewed the risks you should be aware of before investing in hedge funds and how you can go about investing in a hedge fund as an accredited investor.
You may be saying to yourself, that’s well and good, but I’m not an accredited investor; what should I do?
I got you. Below are three primary ways to invest in a hedge fund even if you’re not an accredited investor.
1. Fund of hedge funds
In some cases, you may be able to invest in a fund that invests not in securities but multiple hedge funds. In most cases, the minimum investment is lower than that of a hedge fund–as low as $25,000–though that is still higher than the minimum of many mutual funds.
By investing in various investing styles, managers, and strategies, a fund of funds may provide greater diversification than a single hedge fund. However, diversification alone cannot guarantee a profit or ensure against a loss.
A fund of funds may or may not be registered with the SEC; make sure you find its status. Even if it is registered, remember that any SEC protections apply only to the fund of funds, not to the underlying hedge funds in which it invests.
Even if a fund of hedge fund is registered with the SEC, there may not be a secondary market, and you could have difficulty selling your shares readily. Also, a fund of hedge funds is not required to redeem your shares at any time, as an open-ended mutual fund is.
Remember that you will be paying a double layer of fees: one set of fees to the fund of funds and, indirectly, another set of fees charged by each of the underlying hedge funds.
2. Hedge-fund index funds
In some cases, financial information providers and companies have developed indexes that attempt to reflect the overall performance of the hedge fund industry.
For example, Standard & Poor’s has developed the S&P Hedge Fund Index. A financial professional may be able to help you locate an index fund based on one of those hedge-fund indexes.
3. Publicly traded securities based on hedge funds
In a few cases, private equity and hedge funds have begun to raise money by issuing stock or bonds that trade on the public markets, though they can be difficult to locate, and you may not have the same rights as the fund’s limited partners.
Now it’s your turn. Has your view on investing in a hedge fund changed over the past few weeks? Hit reply and let me know. Would love to hear from you.
Rooting for you,