Key Hedge Fund Metrics to Observe

Hedge funds offer investors alternatives to the mutual fund market. Hedge funds have become very popular in recent years as a way to increase market returns. Here are a few things to consider about hedge funds and what you will want to look at before choosing one.

Hedge Funds

A hedge fund is very similar to mutual fund. With both investments, investors come together, pool their funds and an investment manager makes all the investment decisions for the group. However, it differs from mutual funds in a few key ways. First, you have to be an accredited investor. This means that you have to have a net worth of $1 million, or have earned at least $200,000 for the last two years. This usually makes this an investment vehicle for the wealthy.

Hedge funds are also not regulated by the SEC in the same way that mutual funds are. They are not required to register with the SEC and typically utilize many alternative investment vehicles. Therefore, as an investor, you will want to do a thorough amount of research on each hedge fund that you are considering because you can lose a lot of money.

Leverage

One of the most common features of a hedge fund is its use of leverage. Hedge funds regularly use large amounts of leverage to amplify the returns for their investors. Instead of simply using the funds that were provided by investors, they borrow against those funds to produce even more money to invest. This practice is not allowed with traditional mutual funds and is new to many investors.

When looking at a hedge fund, you will want to take note of the amount of leverage that is used. While you may want to bring in a good return on your investment, you do not want to put yourself at an increased level of risk. Hedge funds typically require you to invest a substantial amount of money. Therefore, with all this money at stake, you want to make sure that there is a good chance you will be able to get your initial investment back. Too much leverage creates a scenario with too much risk for many investors.

Investment Goals

When looking at a hedge fund as a potential investment, you will also need to examine what they want to accomplish. A mutual fund uses a benchmark to gauge their performance from year to year. Hedge funds do not use these benchmarks and instead try to reach certain investment goals for their investors. If you want to accomplish a certain investment goal, you need to find a hedge fund that has the same financial goals that you have. 

Investment Criteria

As a potential hedge fund investor, there are many things that you want to evaluate. Make sure that you feel comfortable with your potential hedge fund before you invest your money. Investing in a hedge fund can be highly risky, so you will want to make sure that you do your homework first.

If you are not sure what you are getting into or do not understand something, move slowly and consult a financial adviser because you can lose your investment very quickly.

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