Getting The Lowdown On Pros And Cons Of Investing In Hedge Funds

How does a hedge fund operate and what is the market like in Canada? A hedge fund is something that pools investors’ money and invest it with the aim to make a profit. Many of the funds invest in a variety of markets. Unlike mutual funds, the managers of such funds actively oversee and manage the investment portfolio. The aim is to generate high profits, regardless of the market conditions or index movements. Hedge fund managers are allowed more freedom when developing trading strategies, unlike mutual fund managers. The two main reasons to invest in a hedge fund are portfolio diversification and higher potential returns. At the same time, some hedge funds are speculative. Many of these investments are quite risky and can result in major loss as well as gain.

Before you decide to invest in a hedge fund, you should get as much information and marketing materials about it as possible. You need to be aware of the risk involved. Find about the investment strategies of the fund and whether they correspond with your risk tolerance and goals.

Even in Canada, the speculation is such that your right to redeem shares may be limited. The opportunity to cash in shares may be restricted with some funds. This can be done during certain times of the year, and up to four times in total. Note that some of your funds cannot be withdrawn for some period of time, for example one year.

What fees to expect? The asset management fee many funds charge will be equal to 1 – 2 percent of the assets, including a portion of the profit. If such is not generated or there is an outright loss, they take no responsibility, of course. The fees on performance options are quite high with some funds, and this may explain why staff takes excessive risks.

How does the issue of liquidity stand with hedge funds? The fund may invest your money in illiquid securities, and these are not easy to value. You should take the time to figure out how the assets are valued and make sure you understand the rules for liquidating your investment.

Canadian hedge funds are traded on both exempt and retail markets. The level of regulation is significant with the retail market. These ban some types of investment strategies. For this reason, most of the hedge funds in Canada are traded on the exempt market, where there is no limit on the type of investment strategies used. The funds traded on this market are typically property of large-scale institutional investors and extremely wealthy individuals.

There are many different types of hedge funds you can choose from. They vary with the respective market (equity, bond, forex, goods, stock) and the strategy (micro, macro, global). They also vary depending on the financial instruments used (derivatives, long/ short positions, etc.), the degree of risk, and more.

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