Hedge funds are professionally managed investment funds that use aggressive strategies to try to earn higher returns. They’re not designed for beginners. In fact, many hedge funds are only available to investors who meet certain income or net worth requirements.
A hedge fund pools money from investors and uses a wide range of strategies to try to grow that money. These strategies may include short selling, leverage (borrowing money to invest), derivatives, and other complex techniques that are not typically used in mutual funds.
Unlike mutual funds or ETFs, hedge funds are not widely available to the public. They’re considered “private” investments and are often only offered to accredited investors—people who meet specific financial criteria.
Hedge funds are designed to be flexible and aggressive. They aim to make money in both rising and falling markets, and fund managers often have more freedom to take risks.
Potential benefits include:
Access to advanced strategies: Hedge funds can use tools like leverage and short selling to try to boost returns, which are not allowed in traditional mutual funds.
Performance-based incentives: Many hedge fund managers earn a bonus if the fund performs well. This can motivate them to seek higher returns.
Diversification beyond traditional assets: Hedge funds may invest in currencies, commodities, or private companies, offering exposure to markets not typically available in public funds.
Hedge funds are not regulated the same way as mutual funds or ETFs. They don’t have to follow the same disclosure rules, and they may not offer daily pricing or easy redemption. This means you might not be able to sell your investment quickly or know its exact value at any given time.
They also tend to charge higher fees. In addition to management fees, hedge funds often include a performance fee—typically a percentage of any profits earned.
Hedge funds are considered high-risk investments. Their strategies can lead to large gains, but also significant losses. Because they’re less regulated and more complex, they’re not suitable for most investors.
If someone offers you a hedge fund investment, it’s important to verify their credentials. Always check the registration of the person or company selling the fund through the CSA National Registration Search.
You should also ask for detailed information about:
The fund’s strategy
The risks involved
The fees and how they’re calculated
How and when you can access your money