There are well over 600 hedge funds that have at least $1 billion in them. We’ve been hearing about hedge funds recently, often in vague terms referring to millionaires and backroom deals, but hedge funds aren’t that shady or complicated.
Hedge funds are investments that wealthy accredited investors flock to because the returns are often higher. If you’re wondering how to invest in a hedge fund, the truth is that very few people are qualified to do so, and many would argue that there’s a good reason for this.
We’ll talk more about what a hedge fund is and discuss some of the specifics of investing in a hedge fund in this article.
What Is a Hedge Fund?
The first thing to know about hedge fund investment is what a hedge fund is. A hedge fund is a type of investment pool that takes contributions from several accredited investors. The manager of the hedge fund then invests that money, often in competing industries or companies, so that one will always pay off and the other will always fail.
As strange as this seems, there is a strategy to it. While it sacrifices a certain amount of potential profits for a company that will lose money, it also guarantees that some money will be made, which helps to shield investors from catastrophic losses.
This shield is especially important because hedge funds often have access to more industries and can legally do certain things that other types of investments can’t.
Accredited Investor
This is where the accredited investor comes in. This investor is always wealthy, making at least $200,000 per year and having an overall net worth of at least $1 million. Usually, accredited investors represent a business, interest group, or some other organization.
This probably sounds like something the wealthy are trying to keep for themselves, but it’s a sensible standard. Hedge funds deal with large amounts of money, much of which isn’t technically theirs, and have very few protections against large-scale losses. Only the wealthy are allowed because only the wealthy can handle the potential losses without suffering financial ruin.
Leverage
When you invest in a hedge fund, you agree to let the hedge fund manager make investment decisions for you, and those managers often use leverage. In the world of investment, leverage is a term that means loans.
Hedge fund managers often use leverage to increase their initial investment amount, and this is where the high risk comes in. If the investment pays out, you keep the profit from your investment and whatever’s left after repaying the loan. If it doesn’t work out, you have to pay more money to cover the loan in addition to whatever you’ve lost.
How to Invest in a Hedge Fund
If you’re wondering how to invest in a hedge fund, you’ve come to the right place. We’ve talked about hedge funds, how they work, and who can invest in them in this article, but there’s always more to learn.
You can learn more about investment topics by looking around our site.