By Dan Barufaldi

Although hedge funds usually get negative media focus, many hedge funds are actually very good investments and can be an integral part of a well-diversified portfolio. But what exactly is a hedge fund, and what are some of the factors one should know about hedge funds before making an investment? In the following tutorial, we'll introduce basic hedge fund characteristics and strategies as well as some simple guidelines for evaluating hedge funds. By no means should this tutorial form the basis of any due diligence process for investing in hedge funds, but it can serve as a guide leading to more fruitful conversations with an investment manager that has experience with these vehicles.

Hedge funds can be very risky investments and many investors have been burned by huge hedge fund blow-ups. On many occasions, investors follow the herd mentality of chasing returns, plunging more and more money into a high-performing fund, without regard for how the performance was obtained and – more important – whether the performance can be repeated in the future.

In this tutorial, we won't expect to create an expert hedge fund analyst out of you, but if you are new to hedge funds or you or your advisor are considering investing in hedge funds, this tutorial will give you some basic knowledge of how they are structured, their strategies and characteristics, as well as how to use them in your portfolio. (For more background, read Introduction To Hedge Funds – Part One and Introduction to Hedge Funds – Part Two.)

Next: Hedge Funds: Structures »


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