Hedge Fund Guide – Selecting Hedge Fund in 5 Simple Steps: A hedge fund is an investment partnership between some people who decide to invest some amount aggregately. The fund uses different tactics to spend the collected money in various fields (stocks, real estate, bonds, or anywhere) to earn money and share it.
People are generally half aware of these types of funds and as a result, choose novice hedge fund managers. They either get low or no returns. But, the right one might help you over-perform the market too.
Being not aware of how to choose the hedge fund, which is best for you is the worst thing. But, to your rescue, below is the Hedge fund guide to help you.
5 Steps Guide to Choose The Best Hedge Fund
1. Understand the Pool
The first step for anyone thinking of investing should understand the hedge funds. It is irrational when people start spending on hedge funds on the advice of their friends, relatives, or anyone else without knowing the fundamentals of it. The ideal approach is to see the objective of the pool, what type of assets are in it, and other parameters under which it operates.
But, it is not a simple method to know the answers to these questions! The reason is unlike stocks and mutual funds; hedge funds do not post much detail about their investments. However, there are some tricky ways to do so.
First, have a conversation with the manager and ask whatever question you have. Second, check the past performance, records, and annual reports to get the idea. If you ask, a fund manager will get the performance report of his aggregate pool quickly.
Further, beware of the fraud pool fund managers. One tip would be to ask them about their employed techniques and strategies while investing. And, if you feel they are reluctant, then it is better to stay away from them.
2. Assess the Risk
It is also imperative to assess the risk of the potential hedge fund in which you want to spend. Hedge funds require you to invest substantial capital, and thus, it is crucial to know what the win and loss percentages are? For instance, in 2006, a multi-billion dollar hedge fund, named Amaranth, lost more than 50% of its value in a couple of weeks only.
When investigated, the reason found was – the fund manager betted on a natural gas commodity on the future option and failed drastically. The manager used high leverage and the future bets option peaked the risk associated.
Generally, it would be best if you ask some questions for evaluating the risk. Some are:
How much Investment is on leverage?
Which Investment Field has the Maximum Exposure of Funds?
How Balanced is The Strategy?
At last, remember high leverage is like walking blindly with full assurance that everything positive will happen!
3. Know the Manager
It is the most significant step of our guide as the fund manager is the person who will handle all your precious money. Thus, there must be something extra in him. Usually, these fund managers are excellent communicators and negotiators. Therefore, it is easy for them to make you fall. However, you need to go beyond it and evaluate him in a real sense.
There must be some USP in his investment organization and through which he would earn returns. Also, he must be qualified enough so that he understands all the opportunities and pitfalls and then make the right decision.
Also, it is crucial that he is from a similar finance background and has some relevant experience.
Now, after understanding the pool, assessing the risk tolerance, and knowing your manager, it’s time to analyze the organization. The fundamental step is to make sure that the firm is genuine and posts accurate results. The right way is to look for the party doing the asset evaluation of the company. A good company always hires external auditors to show its authenticity.
The reason is there are likely more chances of fraud when the firm does only the internal audit and no third-party evaluation. Remember, once a year, an external ‘audit’ will also work.
Also, reviewing the past year’s returns is essential but do not entirely rely on them. Know that the past is gone but understand why the company gave X% return in a particular year.
After the above steps, you would be left with only some shortlisted funds. Now, out of them, choose the most feasible for you. Know your needs and requirements and then invest.
For instance, an older person who wants less risk might go for one, but you might not like it.
So, these were the most natural steps to choosing the best hedge fund for you. Follow this guide carefully and try to acquire as much knowledge as you can, from anywhere. But wait! Do not close before reading these top tips to choose a hedge fund for you and trap funds to avoid here!
Only people with high net worth can invest in hedge funds, and the minimum amount to spend is also generally huge. Thus, it becomes very vital that you do appropriate research and know the basics first if you are also a beginner in the field.
Read as much as you can; here is the list of best hedge fund books that would help you significantly. Also, remember not to invest only in hedge funds but to use them as a diversifying tool in your portfolio. It is very risky to spend on them and has no government interventions.