Investment Funds Basics
Private investment Funds are exempt from registration as described in the Investment Company Act of 1940 and are often structured as Limited Partnerships. The partnerships are managed by a General Partner, or by another investment advisor who reports directly to the General Partner. Private investment funds are offered to Qualified investors who meet the standards for minimum net worth or satisfy other specific requirements. Investors are ‘accepted’ into the Partnership as limited partners by the General Partner. Private funds are not marketed to the general public.
Private funds generally have two types: Hedge funds that invest in securities and financial instruments similar to other pooled investment vehicles; and Private Equity funds that purchase or invest directly in other companies, real-estate, business assets and debt, and other similar items, usually for a specific time period or schedule.
Both types of private investment funds have defined investment objectives and strategies. Investors can find out more about these objectives and strategies by reading the documentation provided by the partnership. The documentation will also describe the risks associated with the investment.
Most private funds have an initial investment period that restricts redemptions or withdrawals from the fund. Redemptions and withdrawal amounts may be limited. Investment in private funds is generally considered long-term.
Key Takeaways for Hedge Funds
As an investor, you should consider several things before investing in a hedge fund.
Hedge funds are private pooled investment vehicles that invest in other securities and financial instruments in pursuit of a specific investment objective, often with the potential for higher returns than is expected from an associated market index.
Hedge funds are not accessible to all investors. The total number of investors in a fund is often limited due to regulations concerning exemption from registration, and investors are required to meet specific wealth, income, or other criteria to be eligible to invest.
Hedge funds are also known as ‘Alternative Investments’ because they frequently use investment strategies not found in publicly available funds. These strategies can be high- or low-risk but are often designed to provide higher investment returns in short-term timeframes or target specific performance goals. Some hedge funds focus on specific themes, such as a sector of the economy or a certain country or area of the world.
Hedge funds frequently use leverage, short sales, and other hedging strategies to pursue performance - all elements that give this type of fund its name.
These funds typically have contribution minimums and redemption-timing restrictions. For this reason, they are suitable for buy-and-hold strategies in longer-term investment plans.
Hedge Funds
Private hedge funds can bring a different perspective to an investment portfolio that may otherwise not be available. For those investors with particular needs, or specific performance objectives, this fund class may have the solutions an investor is searching for. Since hedge funds can invest in ways that are different from publicly registered funds, performance can be quite different too, with the potential for higher returns.
Hedge funds can have broad or targeted investment styles. Some funds may utilize the more recognized approach of investing in well-known securities and by accessing leverage and margin to pursue higher returns. Hedging strategies may also be used, creating more risk but allowing the fund to pursue returns more aggressively. Other funds may focus on less-known or unusual investments, with or without long holding periods, that are anticipated to be lucrative at the end of their investment cycle. Hedge funds may be very short-term focused, or may focus on other areas away from returns, such as investing in specific market segments or managing market risk exposure. The range of investment can vary widely, so it may be possible to find a fund that fills a particular goal in an investment portfolio.
