Can an ETF Hedge Fund Work for You?

An ETF fund will hold multiple, diversified exchange traded funds. Calling this fund a hedge fund means many different things, such as covering how the fund trades, the returns it may expect and even how it is regulated. Most investors will not be starting their own ETF hedge funds. Instead, they will be placing their assets with a hedge fund for ETF trading. If you are considering this option, make sure you understand both how a hedge fund works and how an ETF works to truly evaluate your options.

Hedge Fund Qualities

Hedge funds are accessible to high net worth investors. The funds have such a high asset base, in the hundreds of millions, that they invest at the institutional level on the market. This means they do not need to follow the same rules and regulations as investment houses that cater to retail investors. Instead, they can engage in more risky maneuvers that have the potential for high reward. For the most part, hedge funds look to turn profits quickly by investing in short term growth over long term growth. To do this, hedge funds employ complicated leveraging, options and futures modeling.

ETF Qualities

ETFs, unlike hedge funds, actually simplify the way investments are organized. ETFs are bundles of underlying stocks, currencies or indexes. The ETFs trade daily at the value of the sum of all of their parts. This can be more simple for an investor to understand than trying to track each of the underlying parts separately. This also allows for slightly more diversification. However, some ETFs are extremely narrow, tracking one currency or the assets of a single bank.

Advantages of ETF Hedge Funds

ETF hedge funds combine the best features of ETFs with the best features of hedge funds. They invest in bundled opportunities and track those bundles. They track them over shorter periods of time, and the aim is to generate very high returns in reward for very high risk. One unique advantage to ETF funds of all types is how they are taxed. Compared to their historical counterparts, mutual funds, they offer many tax benefits. Capital gains on ETFs are not taxed annually. Instead, you only have to pay the taxes once upon the sale of the ETF. You can allow your funds to grow year-by-year without paying a penalty. This can be helpful with hedge fund ETFs because of their volatility on a yearly basis.

Risks of ETF Hedge Funds

Investing in any hedge fund opportunity means high risk. Typically, only investors that have a deeper understanding of the market will engage in this type of product. When you place funds with a hedge fund, you will not find as much explanation of the fund's plans for the money as you will with a similar investment in a mutual fund. Instead, the hedge fund has little requirement to provide you with any explanation, information or assistance. The fund's main job is to try to make you money. In many cases, this will succeed. If the fund fails through poor decision making, though, you will be less protected by law to recover funds.

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