Why Hedge Funds

Why hedge funds? Why invest in hedge funds instead of mutual funds, or equities and bonds directly? The most important reasons why and why not.

Why Invest in Hedge Funds

Professional Expertise

Hedge funds are usually run by investment professionals who have extensive experience in particular hedge fund strategies. That means that they are the ones in the best position to take advantage of that arbitrage opportunity or that special one-off financial takeover. The casual investor would have to work much harder to even identify these opportunities, let alone take advantage of them on time.

Low correlation with other investment classes

Hedge funds historically share a low correlation with other investment classes such as equities, bonds or real estate. That means that even if other classes were to move up or down, hedge fund investments would not necessarily follow. Low correlation is an important principle of good asset allocation; hedge funds can be a valuable way to diversify your assets and ‘hedge’ your investments.

Strong focus on absolute returns

Unlike mutual fund managers, hedge fund managers do not seek to just ‘beat the market’. They do not measure themselves merely against the market index. Instead, they measure themselves against other hedge funds, and emphasize absolute returns. Hedge fund managers seek strong performance while minimizing risk. For example, hedge funds are more than willing to short securities in order to minimize market risk.

Hedge Funds vs Mutual Funds

Lack of Liquidity

The main reason why some people may not want to invest in hedge funds is that they are a relatively illiquid form of invest. Mutual funds are required by law to provide daily liquidity to their investors. However, hedge funds are not required to do so.

There is minimal liquidity to hedge funds, and investors are only permitted to withdraw their cash at fixed intervals. Some hedge funds even only allow investments and withdrawals once every few years.

Why Hedge Funds

If you are looking to make a quick profit, hedge funds may not be a good investment. Otherwise, if you are seeking to build long term wealth, hedge funds are an excellent investment choice.

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