Why You Should Invest In Hedge Funds
The Dynamic Wealth Report
July 19, 2010
by Jay Chernoff, Editor
What comes to mind when you think of hedge funds?
Do you picture greedy Wall Street types swimming in cash while the
average person drowns in a sea of debt?
I’m sure that’s what mainstream media wants you to think…
The media loves to depict hedge fund managers as villains. They get
lumped in with Wall Street bankers and oil company executives. Don’t get
me wrong, bankers and oil execs are unpopular right now for good reason. And their companies have suffered as a result.
But here’s something you may not realize… Hedge funds had very little to
do with the Great Recession.
In fact, they can be excellent alternatives to mutual funds.
And right now, hedge funds are a great place to invest your money. Plus,
it’s easier than you may think.
So let’s take a closer look…
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A hedge fund is an aggressively managed portfolio of investments. They
usually require a large initial minimum investment. And, they typically
charge hefty management and performance fees. Hedge funds are lightly
regulated so managers can invest in just about anything. Stocks, bonds,
commodities, options, futures, swaps, real estate, currencies… whatever
you can think of is fair game.
As you might expect from the name, hedge funds often hedge their
investments. They can use strategies like short selling or products such
as derivatives to reduce risk.
But let’s get to the bottom line… Why are they better investments for
you than mutual funds?
First off, hedge funds attract the brightest minds in the financial
industry. But it isn’t just plain smarts making these people special. They’re also extremely innovative.
Mutual fund managers have been using the same old investment methods for
decades. Sometimes they work. Other times they fail miserably, like over
the past couple years.
But hedge fund managers – they push the envelope constantly with new
investment ideas. They aren’t going to settle for mediocre returns if
they can help it. I know those are the sort of people I want managing my
money.
Here’s another benefit…
Hedge funds can be much more diversified investments than mutual funds. Managers of mutual funds are limited in what they can invest in. For the
most part, they can’t hedge or use derivatives. They also can’t invest
in illiquid securities.
Basically, if you own a mutual fund, you’re stuck with a buy and hold
strategy – whether you want it or not. Hedge funds don’t have anywhere
near the same restrictions. They can offer investors exposure to a much
wider variety of strategies.
Which leads me to my next point…
Hedge funds can generate much higher profits than mutual funds.
You’re getting a more diversified portfolio by investing in hedge funds. And you’re getting the potential to make huge returns. Hedge funds have
the flexibility and variety in their investment choices which mutual
fund managers can only dream of.
This does mean the risks can be greater. But remember, you’re dealing
with some of the smartest investments gurus on the planet. And ‘buy and
hold’ hasn’t exactly lit the world on fire lately…
By now you may be wondering why mutual funds are so popular. If hedge
funds are so much better, why aren’t more people invested in them…
Up until now, the issue has been eligibility. You must be an “accredited
investor” to get into hedge funds. This means you need to have $1
million in net wealth or make at least $200 thousand a year. Obviously,
this puts hedge funds out of most people’s reach.
But, that’s no longer the case…
Now it’s easier than ever to invest in hedge funds.
Some enterprising companies noticed how successful hedge funds have
been. So they decided to create ETFs which replicate hedge fund
performance.
One company called IQ Hedge developed three ETFs which attempt to mirror
a few common hedge fund strategies.
The IQ Hedge Multi-Strategy Tracker ETF (QAI) tracks a diverse group of
hedge fund strategies. The IQ Hedge Macro Tracker ETF (MCRO) tracks the
popular global macro strategy. Finally, the IQ Merger Arbitrage ETF
(MNA) attempts to profit from corporate events such as mergers and
acquisitions.
Consider adding any of the three ETFs to your portfolio. You’ll get
exposure to hedge fund strategies without the exorbitant costs.
• Residential REITs (Up 6%)
The Residential REIT sector continues to perform well. The growing
amount of apartment rentals is driving the recent increase in REIT
prices. We could see further increases if home ownership continues to
decline.
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