Four Key Questions to Ask Before Making a Hedge Fund Investment

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If you are thinking of investing in hedge funds, you’re likely spending a fair amount of time understanding the different investment strategies and their associated risk/return characteristics. While this is essential to your decision-making process, it is equally important to understand the operations and underlying economics of a fund – the associated fees and expenses charged by the fund, the fund manager and any third-party service providers, and how often can subscriptions or redemptions be made. These considerations may determine whether an investment is appropriate for an investor’s risk profile and investment objectives. The hedge fund world is complex and there is a lot to take into consideration.

Before making a hedge fund investment, investors and their advisors should consider four key questions:

1. Where does a hedge fund fit in your overall portfolio?

Hedge fund strategies extend across all markets, from equities and bonds, to commodities, currencies, credit, and derivatives. They can be guided by fundamental research, or they may be driven by quantitative methods, which explore not only the value of individual assets, but also make use of statistical analysis to exploit trading patterns, sectoral trends, or the rise and fall of volatility, for example. Hedge fund managers have developed a wide range of investment strategies that target an equally diverse range of investment objectives, including return enhancement, risk mitigation, and capital preservation. When considering an allocation to hedge funds, it is important to develop an understanding of the strategy objectives and investment styles to determine how hedge funds can complement your existing portfolio and align with your overall investment goals.