Hedge funds are known as “absolute return” vehicles because their managers aim for positive returns in all types of market conditions, regardless of how stocks or bonds perform. Over the past 10 years, hedge funds have outperformed the U.S. stock market by several percentage points per year, with about half the risk.
To accomplish these results, hedge fund managers apply tactics you won’t encounter in a standard mutual fund. In order to earn profits, bull market or bear, hedge funds can use short-selling, leverage, derivatives, and arbitrage. They can trade commodities, futures, and options as well as stocks and bonds.
Hedge funds are private investments so you have to hear about them from a financial pro. Traditionally, the minimum investment has been $1 million, or even more. Lately, though, the hedge fund universe has become more accessible: some financial firms have put together “funds of funds,” with minimum investments of $100,000 or even less.
Thus, for $100,000 or so, your money may be pooled with cash from other investors and placed in a number of hedge funds. Nevertheless, you shouldn’t put more than 10 percent of your portfolio in such funds. Before you invest at all, make sure you understand how the fund will invest and how your money will be used to compensate the manager.
