Hedge Fund Lack of Transparency Comes at a Cost

While hedge funds can provide investors with astounding returns, sometimes the lack of hedge fund transparency can result in problems. Here are the basics of hedge funds and why their lack of transparency can affect you as an investor.

Hedge Funds

A hedge fund is an investment vehicle that is somewhat like a mutual fund for the wealthy. In order to get involved in a hedge fund, you must be an accredited investor. This means that you have a net worth of $1 million or you have made at least $200,000 in each of the last two years. Therefore, you have to have a substantial amount of money in order to get involved. Wealthy people use hedge funds as a way to grow their investment portfolios by other than traditional means.

Hedge funds are not subject to the same scrutiny that mutual funds are under the Securities and Exchange Commission (SEC). Hedge funds do not have to be registered with them and are free to use alternative forms of investment. For example, they can use large amounts of leverage in order to amplify returns, whereas mutual funds cannot. Many hedge funds employ very complicated investment techniques to bring in higher than average returns on investment.

Hedge Fund Secrecy

The idea of a hedge fund can be very appealing for those that qualify. You can look at it as a form of investment that is not available to the general public and can produce higher returns than your average investment. However, with less scrutiny from governing organizations, comes more opportunity for unscrupulous hedge funds to operate. Investors can be in the dark about what is actually happening with their money.

Investment Considerations

Several cases have been reported in recent years of hedge fund managers that were using their clients' money for things other than the expected investments. Many times, the money was never recovered for the clients.

If you are considering investing in a hedge fund, you want to do a substantial amount of research about it first. Make sure that you are dealing with a legitimate hedge fund manager that you feel comfortable with. Many hedge funds have been in operation for many years and are legitimate businesses. However, new hedge funds spring up every day and try to get their hands on investors' money. If you want to be safe, work with only the established hedge fund managers for your investments.

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