Hedge funds pool together money from clients and invest in a stated strategy. Hedge fund strategies are typically riskier than traditional investment strategies found in mutual funds or exchange-traded funds. Common hedge fund strategies include Global Macro, Event Driven, Relative Value, Credit Funds, Long/Short Equity Funds, Quantitative Funds, Multi-Strategy Funds, and Managed Futures.
Oftentimes, hedge funds charge higher fees compared to other investments. It is common for hedge funds to charge annual fees of 2% and performance fees of 20% of any profits. In order to charge such high fees, hedge funds attempt to obtain larger returns. By seeking high returns, hedge funds often take on higher levels of risk. In fact, since hedge funds are often paid a percentage of the gains, hedge fund managers are incentivized to take on more risk. For these reasons, hedge funds are not suitable for most investors.
Some hedge funds also employ leverage (borrowing money to increase investment exposure) and other strategies that create additional risk to the investor. Some hedge funds are not regulated with the SEC the same way that mutual funds are. Some hedge funds are not required to register or file periodic reports with the SEC.
Hedge fund managers owe a fiduciary duty to their investors, and financial advisors should only recommend hedge funds that are suitable for the customer. Because hedge funds can be risky, many are not suitable for retail investors.
Please contact us for a free and confidential case evaluation if you believe that you have lost money due to investing in hedge funds.