Hedge funds are lightly regulated private funds that may take highly leveraged positions in securities or financial futures. Originally created for wealthy individuals and institutional investors, many hedge funds are now offered to mainstream investors. Firms such as Citigroup and Merrill Lynch are sponsoring hedge funds with investment minimums as low as $25,000, rather than the $250,000+ that had been common for hedge funds.
These low-minimum offerings usually involve funds of hedge funds. With such investments, investors get a stake in many different hedge funds, perhaps using different strategies. Diversification can reduce the risk inherent in hedge funds.
Even with funds of hedge funds, investors need to be cautious. Hedge fund returns were over 20 percent per year in the past but they have come down recently. In addition, some funds of funds add layers of extra fees (a 1 percent to 3 percent sales fee, 3 percent of assets, plus 30 percent of profits) that can drastically cut into performance for investors.
