Hedge funds are financial partnerships that operate outside of many of the traditional regulatory restrictions that can hamper mutual funds and commonplace investment vehicles. While direct interaction with hedge funds is limited to accredited investors, some private equity partnerships list themselves on public stock exchanges and can be traded by otherwise-excluded participants.
Going public is an interesting move for a hedge fund since many attract investors, in part, by touting the lack of disclosures, reports and public information. While going public subjects the fund to a greater degree of scrutiny, the portfolios themselves would still be shielded from the investing community – only actual performance and aggregate values need to be disclosed in the annual reports.
A fund that elects to go public can be traded like any other listed security, allowing the investing community to gain exposure to the profits and losses of an otherwise unattainable portfolio. Hedge fund initial public offerings (IPOs) are rare because many hedge funds are simply too volatile to achieve high valuations. This volatility also extends to those who purchase a publicly traded hedge fund security. Additionally, hedge fund managers are not concerned with generating shareholder value through stock appreciation the way a growing company might. Hedge fund managers tend to be focused on one thing: cash returns on their investments.
The public can also elect to invest in funds of hedge funds. As the name suggests, these are built from a portfolio of hedge funds. Most have relatively low minimums and represent a safe way to gain indirect exposure to the hedge fund world. Like any other type of diversified investment vehicle, risks are strategically reduced, but the upside potential is also limited.
(For related reading, see "Hedge Fund Risks and Performance.")