Warrior Trading Blog

Hedge Fund: An Inside Look

Hedge Fund: An Inside Look

The stock market is a complex place in which many people try many different strategies in an attempt to make money for themselves. Virtually everyone who has ever bothered to invest in the market in the first place has had a desire to beat the market averages and make more money than they ever dreamed possible. Why would anyone not want to try to make more money than just the average? We all feel that we are better than the average person, and beating the market would be one way to prove it, at least to ourselves.

Investing in a hedge fund isn’t for everyone and not just because they offer riskier investing styles, but because they require by law that clients be “accredited investors”. This means that you have to be somewhat financially savvy and the way they determine that is by requiring you to have a net worth of at least one million US dollars (excluding primary residence) or have an annual income of at least $200,000 each year for the previous two years. The reason for this is that they want investors who know how to handle money to be investing in Hedge Funds because they will have a better understanding of what the risks are and how to handle them.

Different Strategies

Since everyone has a strategy in mind when they invest, it is not that surprising that there are numerous hedge funds which exist to put those strategy ideas into motion. For example, there are hedge funds that specialize in long/short strategies, trading macro economic events, market neutral strategies, arbitrage and many more. There are hedge funds popping up everywhere now and each with their own niche. That is why modern day hedge funds tend to have more complex strategies than ever before as competition is getting greater and greater.

While the average person likely cannot easily get their money into such specific investments, the hedge fund managers can do so easily. The small fish investor does not have the same resources that the hedge fund person does. It would be burdensome and incredibly expensive to get money into a variety of investments around the world, but it would be no problem for the hedge fund manager to make that happen.

Fee Structure

Those who invest in hedge funds obviously have to pay the managers of these funds a fee for the work that they do. It is just part of the game that the managers get their cut of the pie. They work for fees like this, and each and every one of them has a different structure. It makes sense to look into what the fee structure is before investing to see if it is even worth it to you. Some hedge fund managers pull too much from their funds to make it worth it, but many are fairly priced. Most commonly hedge funds will have a fee structure that is a 2% administration fee taken out yearly and then will take 20% of the profits.

Bottom Line

A hedge fund is a way to get some money into particular strategies and ideas that are not easy to find in the traditional markets. They are often used as a way to balance out the traditional investments that one has in the markets in general.

Although there are some who demonize the term “hedge fund”, there is absolutely no reason to feel like that. They are simply another way to invest money and hopefully beat the markets and make a profit. It is fair to try to do this and there is nothing morally wrong about hedge funds. The only thing to look for is their fee structure and their historical performance to gain a better understanding of how they operate and how well they have performed for their investors.