Friday, October 26, 2007

Have you been approached with Hedge Fund Investing?

A financial adviser recently approached me with the prospect of investing into a fund that in turn invested in large hedge funds. While the idea looks fascinating, I am pretty confident that hedge fund investing is not for me and for most of the people I spend my time at work and play. Agreed, hedge funds probably return in many multiples of what an average joe mutual fund or directed investment plan will return. Hedge funds have the best names in the market associated with them. Agreed that partners at Hedge Funds are perhaps the most handsomely paid professionals or owners in the country today. However, all these positive points have a cost. Firstly, it is the risk. That's the biggest factor to consider. Having said that, I won't talk too much about it. Thats coz risk is matter of individual/institutional perception. There is no yardstick for risk. It is all relative to your risk appetite. For example, skiing is considered very risky by some people and hence not a favored game. There are others who would rather spend all their time in the mountains over anywhere else. The fact of the matter is that hedge funds are also extremely expensive. It is typical for a hedge fund to charge upwards of 2% of assets under management as fees. At the lowest level that puts it close to an expensive mutual fund. Next, Hedge Funds usually keep something like 20% of profits for themselves. WOOOOW! Finally, most hedge funds lead to ordinary income and hence taxable as short term gains along with your other income (you have your bread and butter job don't you?). These three things make Hedge Fund investing really unsuitable for an individual investor putting her/his hard-earned money into a fund of Hedge Funds. There is a very good article at the NYSE website that provides more information. Happy reading and wish you a safe investment.

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