Perhaps you’ve got a rather large sum of money you’re seeking to invest. You’ve got many options available, but one favored by many high-level investors are hedge funds. Though hedge funds can provide a fantastic return, they aren’t easy to manage or even understand. The experience and talent of a great CPA firm or investor will be needed if you want to make the most of your hedge fund. This is far from a “set it and forget it” investment, and will require constant upkeep and management. In order to find success with hedge funds, you’ll need someone who has an expert understanding of investing, accounting, and financial markets. The term comes from the act of ‘hedging,’ a strategy with the goal of turning a profit regardless of the condition of the economic environment.
Hedge funds are dynamic and provide investors with many options when it comes to investment opportunities. Hedge funds however, don’t require the same level of transparency and reporting as mutual funds and other similar investments. The fund manager will be responsible for a yearly audit, but nothing really beyond that. While mutual funds require routine and detailed financial reporting, the audit is the only thing you’ll see regarding your hedge fund.
Now that you know the complexity of a hedge fund, you likely realize that the guidance of a talented accountant or investor is definitely required. Even still, it’s good to know a bit about hedging yourself, as it will make the yearly audit much easier to understand and evaluate. Hedge funds rely on two different types of investment positions, ‘long’ and ‘short.’ The most basic of the two is a ‘long position,’ which functions much like a normal investment. It simply involves investing in a stock that the investor believes is undervalued and waiting for it to increase. ‘Short positions’ are where things begin to get complicated however. This is what requires hedge fund managers to have a deep knowledge borrowing and repaying, as well as buying, selling, and then re-buying. It seems simple on the surface, but when it comes to stocks and securities it gets complex quickly. The hedge fund manager will use his or her expertise while investing in stocks that they anticipate dropping in value. It seems counter intuitive, and this is why it requires an expert’s touch. There are many CPA firms with people ready for just the task!
Ultimately a hedge fund seeks to provide an “absolute return.” That is, a return regardless of how the market looks at the time of the investment. It’s difficult for some people to understand how a profit can be made when the market is trending down, but it’s definitely possible. Experienced investors have a track record of success, but an investor still assumes a risk when it comes to a hedge fund. This risk will be much greater is one who is not experienced in hedge funds attempts to investor like a professional. The more experienced and knowledgeable about hedge funds the investor is, the greater the chance for success. It may seem simple as first, and you may readily understand that a ‘long position’ is used when an investor is confident the value of the stock will increase while a ‘short position’ is used when it’s strongly suspected the value will decrease, but if you’re not an expert you’ll need help.
To understand a little bit more about hedge funds, let’s look at one of the more common strategies.
Reviewing the 130-30 Hedge Fund Investment Strategy:
- First $100 is invested in a stock group believed to be undervalued. (Stocks that are worth more than their price)
- $30 of the worst-performing of these stocks is used as collateral on a $30 loan of stock believe to overvalued. (Worth LESS than its price)
- The $30 worth of loaned stock is sold right away, while the investor anticipates a price drop.
- If the drop occurs as planned, let’s say from $30 to $10, it is re-purchased for the lower price.
- The broker will then return the stock he or she has just purchased for $10, getting their $30 of collateral back, making a profit of $20.
- The $20 is re-invested into the best performing stocks.
Anyone considering investing in a hedge fund should learn as much as they can about them first. It’s a wise choice to speak with an experienced accountant, investors, or provider of any other financial services before deciding to invest in a hedge fund. Don’t forget that the interest is a valuable tool as well, with a plethora of information regarding hedge funds.
In years past, only big money investors with tons of excess cash were investing in hedge funds. They weren’t really accessible or available to “regular people.” This isn’t the case any more however, the economy has shifted and hedge funds are much more accessible than they once were. Remember however that very little information is required to be given to the investor regarding hedge funds, because they are private investments. This is different from mutual funds and other more common investments. These typically require quite a bit of information to be released about them, with frequent and detailed financial reports.
Since hedge funds typically only get one hedge fund audit per year, it’s extremely important. The SEC (Securities Exchange Commission) requires and oversees the audits. These audits are beneficial in order to ensure that they fund is being managed properly, and that financial statements are clear and accurate.
Before you leap into a hedge fund, be sure to examine all the implications and risks. When handled properly, they can be a fantastic investment opportunity.