Getting The Lowdown On Pros And Cons Of Investing In Hedge Funds
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How does a hedge fund operate and what is the market like in Canada? A hedge fund is something that pools investors' money and invest it with the aim to make a profit. Many of the funds invest in a variety of markets. Unlike mutual funds, the managers of such funds actively oversee and manage the investment portfolio. The goal is high returns, irrespective of the index or overall market movements. Hedge fund managers also have more freedom in developing their trading strategies, compared to mutual funds. The two main reasons to invest in a hedge fund are portfolio diversification and higher potential returns. On the downside, hedge funds can be very speculative. They are known to make risky investments, resulting in major gains or losses. Before you decide to invest in a hedge fund, you should get as much information and marketing materials about it as possible. You need to be aware of the risk involved. Find about the investment strategies of the fund and whether they correspond with your risk tolerance and goals. Even in Canada, the speculation is such that your right to redeem shares may be limited. Many such funds will restrict your opportunities to cash in your shares. This can be done during certain times of the year, and up to four times in total. Note that some of your funds cannot be withdrawn for some period of time, for example one year. What fees are charged on your funds? The asset management fee many funds charge will be equal to 1 - 2 percent of the assets, including a portion of the profit. If there is no profit, the fund does not take responsibility to cover your loss. Some funds charge very high fees on "performance" options, and this may stimulate staff to take excessive risks. What about liquidity issues? Your funds could be invested in illiquid securities, which could be difficult to value. It is best to learn more about the ways of liquidating an investment and how assets are valued. In Canada, hedge funds are traded on retail and exempt markets. The retail market is subject to a significant amount of regulations. Some kinds of investment strategies are not permitted. For this reason, most of the hedge funds in Canada are traded on the exempt market, where there is no limit on the type of investment strategies used. Trading on this market is associated with wealthy individual investors and large-scale institutional investors. You can choose from a variety of hedge funds. They vary with the respective market (equity, bond, forex, goods, stock) and the strategy (micro, macro, global). They also vary depending on the degree of risk and the financial instruments employed (short/ long positions, derivatives, and so on.