How Do You Invest in a Hedge Fund

Hedge funds are the most talked-about financial products of the last 25 years, and a lot of people want to know how to invest in a hedge fund. These dynamic, high-return and high-risk investment vehicles are relatively unregulated in the United States, but their advanced structure and enormous market share make them inaccessible to all but the most elite investors.

Hedge Fund Investment Regulations

By U.S. law, you must have $1,000,000 in assets and professional-level financial knowledge to invest in a hedge fund, so most shares are owned by organizations and wealthy individuals, according to Investopedia. Structurally, they’re nearly identical to another type of pooled investment fund, called a mutual fund, that is open to small-scale investors. A hedge fund is simply a collection of securities in the form of stocks, bonds, real estate, credit, derivatives or commodities, the same types of products a mutual fund invests in.

As in a mutual fund, investors in a hedge fund own shares of the fund rather than of the securities owned by the fund, and their investment is managed by a firm of financial professionals headed by a fund manager. A hedge fund manager owns shares in the fund so that investors have some assurance that the fund will be managed effectively. In contrast, a mutual fund is often managed by a person who has no stake in the investment and receives the same compensation whether the fund performs well or not.

How Hedge Funds Are Operated

The compensation package of a hedge fund manager includes a percentage of the total assets owned by the fund as well as a percentage of the fund’s growth over the previous year. This compensation is in addition to the earnings the manager receives from shares in the fund. Generally, clients approach a hedge fund based on its reputation, and the firm employs a staff of investor relations specialists to personally deal with all clients. If you ever get to invest in a hedge fund, you’ll most likely talk to these employees of the firm. They’re often hired based on their social skills and physical appearance, and because most hedge fund clients are men, investor relations professionals are usually women.

Although hedge funds have become one of the most popular forms of investment over the last 25 years, they started out as a very risky product with minimal chance of payoff. Throughout the 1970s, investors lost millions of dollars in funds that were managed by people with no vested interest in the funds’ performance. During the stagflation of the Ford and Carter administrations, tanking stock markets caused the big hedge funds of the day to sink, and they didn’t regain popularity until the financial resurgence of the 1990s.

Buying Shares in a Hedge Fund

Hedge funds have never had strict regulations imposed on them, because only the financial elite have been able to invest in them, but following the subprime mortgage crash of 2008, the Securities and Exchange Commission has increased oversight of this market. At its peak, the hedge fund industry was worth $2.4 trillion, although a lot of this value was lost in the financial collapse.

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Investing in financial products is a great way to acquire wealth, and hedge funds offer some of the highest returns available. If you aspire to join the financial elite, you may have a chance to invest in a hedge fund.

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