Rohit Singh London in Directors and Executives, Entrepreneurs, Business Director - Head of Innovation & Digital Disruption • KPMG May 14, 2019 · 1 min read · +300

Misconceptions about the Risks Related to Hedge Funds

Misconceptions about the Risks Related to Hedge Funds

Hedge funds are an alternative method of investing and are designed to safeguard investment portfolios against market fluctuations. They tend to generate profits in all markets. Investors are always looking for ways to maximize gain while reducing their risks. Many have shied away from hedge funds due to circulating myths. Some of the myths are merely old truths that have evolved and adapted throughout the years.

Hedge Fund Myths Exposed

  • Risky Investment - Hedge funds were created to protect investments against the rise and fall of the markets. The hedge fund market uses many tools and strategies to invest and trade. The prime broker manages and controls the leverage that is minimized in order to secure a substantial gain.

  • Non-regulated Environment - A hedge fund must still operate under standard marketing, promotion, stock exchange, and security regulations in accordance to the market.

  • High-net-worth Investors Only - The hedge fund marketplace has broadened and diversified their products to include smaller investments and new styles.

It is important to do away with these hedge fund misconceptions by encouraging better communication amongst financial advisors and investors regarding their role in providing the right tools needed to fulfill their funding objectives. Where funds should be allocated should be decided by both sides. Researching current market trends and seeking consultation will provide a broader picture before investments are actually made.

Hedge Fund Investment Facts

  • The minimum hedge fund investment usually falls between $500 thousand and $1 million.

  • Hedge funds earn money through management and performance fees. Depending on the hedge fund selected this cost could range between 1% - 4%.

  • Hedge funds are not a get rich quick scheme.

  • Shares cannot be redeemed on randomly chosen dates. Shareholders must inquire on the dates for redemption of shares.

  • Hedge funds are not open to the public.

  • Hedge fund performance does not rely on the rise and fall of the market.

Building a relationship with your hedge fund manager is crucial. Expressed short-term and long-term financial goals will provide the advisor with a sense of direction. Investors must remain in communication with their hedge fund managers from start to finish. Knowing what is going on will make them feel more secure about where they are placing their money.