The Problem With Hedge Funds

Are hedge funds a suitable investment for you? Hedge funds are an appropriate investment for qualified purchasers with a net worth above one million dollars and an annual income exceeding two hundred and fifty thousand dollars. Purchasers are often required to sign an acknowledgement confirming their qualifications to invest in hedge funds. However, just because one is qualified to invest in a hedge fund doesn't necessarily mean they should do so. There is a major problem with this type of investment. Oftentimes, the risk associated with the fund is misrepresented, leading to investors being misguided into skewing their qualifications.

The term "hedge fund" is a generic term used to describe many unique investments. Put simply, the phrase is derived from the purpose ? hedging the risk of investing. Hedge funds provide lower long-term returns in exchange for less volatility. The form of investment is not new, but their popularity certainly is. The newfound popularity of hedge funds has left many investors wondering what they are all about.

To shed a little light on a decidedly illusive investment tool, a quick run down is necessary. A hedge fund is typically a privately organized pooled investment fund, predominately invested in publicly traded securities. They are normally created as limited partnerships, consisting of one general partner and up to one hundred limited partners. The general partner usually receives a management fee and 10-20% of the profits from the fund. The success or failure of a hedge fund is often dependant on the competency of the fund manager, since they are more aggressively managed and traded than traditional mutual funds.

It should be noted that hedge funds have a higher failure rate than traditional funds. Numerous hedge funds fail by the second or third year of operation. Also, hedge funds are less transparent than traditional funds because some hedge fund managers do not reveal the securities they hold, or the extent to which they are leveraged. Hedge funds may have a higher turnover rate and be less tax efficient than traditional funds.

Along with the aforementioned downfalls associated with hedge funds, several more negatives should be noted. The management and performance incentive fees charged by the hedge fund manager, together with the trading costs and administrative fees can quickly add up, making B share mutual funds seem like a bargain. As stated earlier, only "qualified" purchasers are eligible to invest in hedge funds, leaving many would-be investors out in the cold. And liquidity, if available, is limited to quarterly release, and even then, investors are left at the mercy of the hedge fund manager.

The bottom line is, when dealing with hedge funds, get educated about your investment before jumping in. Discuss the option, both pros and cons, with your dealer, and know what you are getting into.

For more information on hedge funds and hedge fund attorneys, please click here.

---

Price to Earnings Ratio - P/E

After finding the price of a particular stock, usually the... Read More

The 1% Solution

You probably know the story of Sherlock Holmes and the... Read More

Lifestyle Funds Provide Greater Security?

With the stock market stubbornly refusing to settle down and... Read More

Trapeze Artist - Swinging with the Stock Market

When we go to the circus we see a trapeze... Read More

Forecasting the Stock Market

Every day I see in the financial section of newspapers... Read More

Investing in Dividend Paying Stocks

I was recently interviewed for a press release through a... Read More

Forces that Move Stock Prices

Among the largest forces that affect stock prices are inflation,... Read More

Advantages and Disadvantages of Mutual Funds

Outlined below are some of the advantages and disadvantages of... Read More

Online Trading Strategy: Collecting Cash when Stocks Go UP - It PAYS to Know More than Others

When it comes to stock market trading it PAYS to... Read More

Cash

How many people went to a cash position this week?... Read More

Enron Cure

Let's hope you did not have any of the Enron... Read More

The Top 10 Reasons to Invest in Mutual Funds

Everyone who follows the financial news has heard of mutual... Read More

Trading Systems

To become a successful trader you must have some kind... Read More

Boiler Room 7/17/00

On Friday or Saturday evening my wife gets a movie... Read More

When Should I Sell?

People are always asking me when should I sell my... Read More

Online Investing & Online Stock & Share Trading: Difficulty in Taking Stop Losses in the Market

This is an extract of an article which was first... Read More

No Load Mutual Funds: Boost Your Portfolios Returns

Investors who exclusively use broadly diversified, no load mutual funds... Read More

Shadow Bull

As one of my regular readers you know I have... Read More

3 Components Needed for Beating the Market

Time to look back2004 is over, now we are in... Read More

Successful Trading ? Taking Profits - Part 1

So you're started trading, you bought some positions with your... Read More

Invest, Be Wrong, and Make Money in the Stock Market

I have been trading for several decades and was an... Read More

Trading vs Investing

I often hear from people, "I don't trade. I invest.... Read More

What Can Model Airplanes Teach You About Trading?

I was devastated!I just couldn't believe it. I was 10... Read More

Trade Stocks for Real

I read a comment by a forum member on another... Read More

Advisory News Letters

Several times each month I am solicited by various market... Read More

Box Of Chocolates

Ever have one of those sample boxes of candy? Each... Read More

Market Timing

Every broker and financial planner will tell you that you... Read More

Stocks: Understand What You Buy!

"There is nothing more frightful than ignorance in action!" Johann... Read More

Jack and Jill

Jack and Jill went up the hill to fetch a... Read More

The Holy Grail (of Investment)

Every year I go to the Money Show in Orlando,... Read More

Dont Ask Your Broker

Unfortunately, most of you who are reading my column are... Read More

Oil Stocks CHK WLL - What Is Their Worth?

(1) CHK stock price $16.74, NAV $32.5CHK is my favorite... Read More

Stops Make Money

During the day I watch CNBC-TV, the stock market channel.... Read More