Hedge funds are risky investments, so here's what you need to know.
Q. I have a friend who said he invested $250,000 in a hedge fund. I don’t know how much money he has, but I have about $2 million in retirement accounts. Is that something I should consider?Let’s take a step back and define aIn essence, a hedge fund is an investment fund where investors pool their money together and entrust a manager to make investment decisions on behalf of all investors within the fund, said Michael Cocco, a certified financial planner with Beacon Wealth Partners in Nutley.
If the investments work out, that leverage may magnify the gains versus investing without leverage, he said. But if their investments don’t work out, the leverage can magnify the losses as well, and it is normal to experience wild swings when investing in a hedge fund, Cocco said. “Also, most hedge funds, because of their aggressive nature, typically charge higher-than-average fees when compared to traditional mutual funds, exchange-traded funds ,” he said. “It is important to note that each hedge fund has its own investment policy and philosophy, so knowing the parameters of how a specific hedge fund invests is very important.”“Hedge funds are known to be risky and volatile.
You should also consider liquidity. Some hedge funds only allow for redemptions at certain times, such as once a quarter, once a year, or a different arrangement, Cocco said.“Are you fee conscious? Look under the hood to see how they charge their fees and how much. Some charge not just an advisory fee, but a fee based on any profits you make, in addition,” he said.
Also consider transparency. Cocco said hedge funds are not required to share all of their holdings or trades with you in the moment, so you may have no idea of what you are invested in. If you are someone who values transparency, a hedge fund may not be for you, he said.You need to know what your investment goals are — income? growth? — and whether those goals match up with the investments that you may select for your future, Cocco said.
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