by Catherine Rein
(last updated April 6, 2009)
Hedge funds have gained a lot of publicity in the last few years. In 2006-2007 it was for their amazing investment returns and in 2008 it was for their incredible losses. Hedge funds vary widely in their investment goals and methods. They are primarily for wealthy investors and institutions with significant capital to invest hoping to reduce risk and achieve higher than average returns. They are by law restricted to 100 investors per fund and therefore often set extremely high minimum investment amounts, some as high as $1 million.
Hedge funds use a number of different strategies and invest in many different markets. Because of the unique strategies used, investors are often required to keep their money in the fund for a year or more. The difficulty in getting money back out of a hedge fund makes it very important to research and ask lots of questions before getting in. Investors in hedge funds follow these guidelines before investing:
Certainly hedge funds are not for the average investor. The minimum investment amount limits them to only the wealthiest of individuals and institutions. Though they are designed by definition to limit risk (or hedge) their investments, many often require high performance fees and some use highly risky investment strategies. These strategies include short selling (selling a security you do not own), arbitrage (simultaneous buying and selling of securities in different markets), investing in derivatives such as options or futures contracts and investing in volatile international markets.
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