Hedge Funds: A Good Investment?

Some high-net-worth investors put money in hedge funds in hopes of generating outsized returns and diversifying their portfolio. Before investing in a hedge fund, however, it’s important to understand how they work — and their risks.

By definition, hedge funds are aggressively managed portfolios that use less-conventional, riskier techniques such as investing in derivatives, which are contracts to buy or sell a security at a specified price; and leverage, which is essentially investing with borrowed money. Their goal is often to act as a hedge to stock and bond market performance — meaning they can reduce volatility. 

That said, the hedge fund industry’s overall performance has trailed the Standard & Poor’s 500-stock index considerably in recent years. In the five years that ended April 30, 2014, the Credit Suisse Hedge Fund Index gained an annualized 8.5 percent, compared to a 23 percent annualized return for the S&P 500, assuming dividends were reinvested.1

The true performance of hedge funds, however, can be difficult to gauge because most funds don’t publicly disclose their holdings or investing strategies and each have their own style.

Another potential drawback for investors is illiquidity. Most funds require a large upfront investment, such as $500,000, and require at least a one-year commitment. Fees can also be high: Hedge funds often charge investors 2 percent of investments under management and 20 percent of profits.

If you’re interested in hedge funds, talk with your Regions Wealth Advisor. He or she can connect you with portfolio managers who can help you evaluate specific investment opportunities and determine how they fit into your wealth plan.

1. The Wall Street Journal, “What to Expect From a Hedge Fund,” May 23, 2014.


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