As an investor, you are always looking for the next great opportunity to diversify your portfolio and make it more profitable. While there are many types of investments you can make, you might have your eye on hedge funds. Although you’ve heard about them, you may be like many investors and know little about their specifics. If you are wondering whether hedge funds are right for your specific situation, here are some things to keep in mind.
High-Income Requirements
Unlike some investments that can be purchased with small amounts of money, hedge funds are anything but small. In fact, they have extremely high minimum investment requirements, with most requiring a minimum investment of $100,000. For some larger hedge funds, the minimum investment amount may be as much as $5 million.
Can You Handle the Fees?
When you invest in hedge funds, one thing you will notice in a hurry is the types of fees you will be expected to pay as an investor. Hedge fund managers typically have a compensation structure consisting of both a management fee and a performance incentive fee. As a result, you will learn in your hedge fund courses that you will be expected to pay the management fee no matter how good or bad the fund performs.
Hedge Funds are Risky
Compared to traditional stocks and bonds, hedge funds are far more risky investments for your portfolio, especially if you are planning to retire within the next several years. In most cases, hedge fund managers will use the technique of leverage with these investments. This means that they borrow large amounts of money in hopes of increasing a hedge fund’s return potential. However, if they make the wrong decision, you could find your hedge fund investments and any profits they may have earned going down the drain.
The Lock-Up Period
No, this does not refer to you or anyone else going to jail. Instead, the lock-up period as it pertains to hedge funds means that once you commit funds to a hedge fund, you may not be able to redeem the investment for as long as two years. This is because hedge funds require much longer lead times to raise the cash needed for redemptions.
Though hedge funds have been known to provide investors with tremendous returns on their investments, they have also been known to do just the opposite. Thus, when trying to determine if hedge funds are the best investment option for you, always take the points mentioned here into serious consideration.
