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Hedge Funds: How to Plant Your Money
by Merry Sheils
With their high capital requirements, hedge funds may be out of reach of many Americans. If, however, you find yourself with large
sums of cash in the bank you may be wondering how to invest in them. In this last part of Merry Sheils’ three-part article about
hedge funds, the Woman Around Town learns about investment requirements and how to find a hedge fund to invest in. Read Part
1, Hedge Funds: Not Your Mother’s Garden Club Treasury and Part 2, Hedge Funds: Navigating the Maze of Risk and Reward
here.
How much to invest? Once again, the answer depends upon your comfort level and how much you can afford to risk. Because
hedge funds have embedded risk in terms of liquidity, leverage and market factors, the chance of losing your investment can be
higher. If you have an average appetite for risk, most investment advisors suggest no more than 15% in what are called alternative assets, including hedge funds,
private equity, real estate and commodities.
How to go about it? Hedge funds have short-term tax consequences, so ideally, they are best housed in a retirement plan, such as an IRA. Some forward-thinking
corporations offer hedge funds among the options in a 401-K plan, but they are few, primarily because of the risk involved. If an employee loses money through such an
investment, the company can be held liable. Or at least be made miserable while the employee vents.
If your liquid investible assets hover around $5,000,000 or greater, then you generally can “go direct” and invest with a hedge fund
manager, who may require a $1,000,000 minimum investment. But remember, that’s 20% being allocated to the space, a hefty,
significant position and well beyond what most advisors suggest. An investor with $250,000 (and sometimes even less) can invest in
a fund of funds, thereby spreading the risk. But, caveat emptor, these funds have a double layer of fees: one for the hedge fund
manager, another for the fund of funds manager. You may be paying close to 3% and higher for the privilege.
Where to find them? That is the least of your concerns. Every broker in every country has access to hedge funds. Mutual funds
also offer them. But, hedge funds are available also through ETFs, which make them attractive from both a fee and liquidity
standpoint. SeekingAlpha.com published a piece in June 2011 entitled, “5 Hedge Fund ETFs to Watch”. Its short list includes QA1, CSM, RBP, CSMA and GRV. But, none
has more than a 1-year record.
Be careful. Be smart. Understand the strategy. Do your homework. Tread lightly. And, next time you go to a cocktail party and find yourself standing next to a hedgie who
is bragging about racking up outlandish returns, you can combat his arrogance with some thoughtful questions guaranteed to take him down a peg or two. He may just
let you invest in his next good fund.
This article is for entertainment purposes only. It is not to be considered investment advice. Everyone’s financial situation is different and before investing in any hedge
fund, it is important that you consult your tax and investment advisor to see if these types of investments are right for you.
Read part one of Merry Sheils’ article Hedge Funds: Not Your Mother’s Garden Club Treasury and part two Hedge Funds: Navigating the Maze of Risk and Reward.
Tags: 401Ks, CSM, CSMA, ETFs, GRV, Hedge funds, Investments, Merry Sheils, Mutual Funds, QA1, RBP, Seeking Alpha
8/12/2011 11:25 AM
Hedge Funds: How to Plant Your Money « Woman Around Town
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