1. Hedge Funds: Introduction
  2. Hedge Funds: Structures
  3. Hedge Funds: Strategies
  4. Hedge Funds: Characteristics
  5. Hedge Funds: Performance Measurement
  6. Hedge Funds: Risks
  7. Hedge Funds: Why Choose Hedge Funds?
  8. Hedge Funds: The Due Diligence Process
  9. Hedge Funds: Funds Of Funds
  10. Hedge Funds: Conclusion

By Dan Barufaldi

Hedge funds can be complicated investment vehicles that are difficult to understand. This is due partly to the complex strategies they use, and partly to the high level of secrecy inherent in trying to prevent others from copying your investment methodology. It doesn't help the industry that the media usually only showcases hedge funds when there is a huge blow-up or, in a few cases, when a hedge fund has incredibly high returns.

The truth of the matter is that there are hedge funds that generate attractive (relative to expectations) returns, and sometimes the return pattern can be volatile while other times the pattern is very stable. There is a hedge fund to fit the risk/return guidelines of any investor and with proper education, evaluation, and familiarity with them, they become much less intimidating.

This is not to say that anyone should take a hedge fund investment lightly. As I mentioned earlier, there are more risks to a hedge fund than the probability of losing money. For example, there is the risk that an investor may not have access to their cash for extended periods due to lock-ups. And there is a much more subtle risk of a hedge fund having style drift and causing the investor's portfolio allocation to become sub-optimal.

As the industry continues to evolve, we may see additional regulation that may help to assess the merits of hedge fund investing. Or we may see third-party research companies increase their hedge fund coverage to provide opinions to investors. Morningstar has already begun to perform analysis on certain hedge funds and has their own hedge fund database. For now, most of the due diligence needs to be performed by the investor or their investment advisor.

For further reading, check out Hedge Funds Hunt For Upside, Regardless Of The Market and Hedge Funds: Higher Returns Or Just High Fees?

Related Articles
  1. Financial Advisor

    Why Hedge Funds Are Not Living Up to Return Hype

    Hedge funds are supposed to produce better returns while protecting your investments from the downside. Here's why they are not living up to their purpose.
  2. Investing

    Evaluating Hedge Fund Performance

    Most investors are aware of hedge funds, but many don't know the dirty details of this unique investment type.
  3. Investing

    Hedge Funds: Higher Returns Or Just High Fees?

    Discover the advantages and pitfalls of hedge funds and the questions to ask when choosing one.
  4. Investing

    Taking A Look Behind Hedge Funds

    Hedge funds can draw returns well above the market average even in a weak economy. Learn about the risks.
  5. Investing

    Hedge Funds' Higher Returns Come At A Price

    Learn how hedge funds win big gains for investors - and why they sometimes lose.
  6. Investing

    Hedge Funds Tutorial

    Hedge funds can be an integral part of a well-diversified portfolio - if you know how to choose them.
  7. Financial Advisor

    4 Reasons to Still Consider Traditional 2 & 20 Hedge Funds

    Find out why traditional 2 & 20 hedge funds are still worth considering as an investment, even though they have underperformed for the last several years.
  8. Investing

    Hedge Funds Go Retail

    Find out how average investors are breaking into what was once reserved for the ultra rich.
  9. Managing Wealth

    HF Performance Report: Did Hedge Funds Earn Their Fee in 2015?

    Find out whether hedge funds, which have come under tremendous pressure to improve their performance, managed to earn their fee in 2015.
  10. Managing Wealth

    Will Hedge Funds Be Around in 10 Years?

    Learn why some analysts see hedge funds as a dying breed, especially after a torturous January 2016 for fund managers around the world.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center