We talked about the different hedge fund strategies that exist in the previous article. Now let’s dive into how you can actually gain exposure to these strategies. Here are the top five ways to invest in hedge funds:
1. Direct Investment in a Hedge Fund
Direct investment: You can invest in a specific hedge fund directly. This can be done by contacting the hedge fund manager. You will need to complete the necessary paperwork, sign an agreement, etc.
When investing directly, you will typically need to meet certain criteria because hedge funds are typically geared toward sophisticated investors. They often employ complex investment strategies that may carry a higher level of risk that most people would not be comfortable with.
You need to be a high net-worth individual or have a high income to invest in a hedge fund directly. There is also a minimum investment amount required by the hedge fund. That amount can vary widely depending on the fund and the investment strategy it employs.
In the lower range, hedge funds will require hundreds of thousands of dollars at a minimum. In the higher range, it’ll be several million.
2. Fund of Hedge Funds
Fund of hedge funds: This is an investment vehicle that invests in multiple hedge funds at once. The fund of hedge funds diversifies its holdings across different hedge fund managers and strategies, which can help to manage risk and provide a more stable investment return.
This can be a good option for investors who want diversification across different hedge fund strategies and managers, but may not have the financial resources or risk tolerance to invest in individual hedge funds directly.
Like with investing directly into one hedge fund, fund of funds have minimum requirements, so they’re still not reachable for most people.
3. Hedge Fund Mutual Funds
Hedge fund mutual funds: Some mutual fund companies offer hedge fund-style products that are available to retail investors who are not high net worth individuals with hundreds of thousands laying around. These products often have much lower minimum investment requirements.
Because they are subject to the same regulation as any other mutual fund, hedge fund mutual funds may not offer the same level of risk or return as traditional hedge funds. Fees will also typically be higher than traditional hedge funds.
Here are a few examples of mutual funds that use hedge fund-style investing:
- Fidelity Absolute Return Multi Strategy Fund
- Vanguard Market Neutral Fund
- BlackRock Systematic Global Long/Short Equity Fund
Before investing in a hedge fund mutual fund, you should carefully research and assess the risks and potential rewards of the fund.
4. Hedge Fund Exchange-Traded Funds (ETFs)
Hedge fund exchange-traded funds (ETFs): ETFs are investment vehicles that are listed on a stock exchange and can be bought and sold like stocks. They are more liquid and typically come with lower fees when compared to mutual funds.
Some ETFs offer exposure to hedge fund strategies, such as long/short equity or global macro.
Here are a few examples:
- IQ Hedge Multi-Strategy Tracker ETF (QAI)
- iMGP DBi Managed Futures Strategy ETF (DBMF)
- First Trust Long/Short Equity ETF (FTLS)
Just like with the mutual funds above, before investing in an ETF, you should carefully research and assess the risks and potential rewards of the fund.
5. Managed Accounts
Managed accounts: Some hedge fund managers offer managed accounts. These are investment accounts that are managed by the hedge fund manager on behalf of the investor. Managed accounts may have lower minimum investment requirements and offer more transparency and liquidity than traditional hedge funds.
It’s important to carefully research and assess the risks and potential rewards of each hedge fund investment option before making a decision. You should also consider factors such as the hedge fund’s investment strategy, volatility, track record, expenses, and liquidity before investing.