A Investment Opportunity Reserved

2008-01-10T00:31:00.000-08:00

An investment opportunity reserved for the more sophisticated investor is a hedge fund investment. This is one that could be defined a few different ways. One definition of a hedge fund investment opportunity is through a private hedge fund. Wealthy individuals and institutions are allowed to use aggressive strategies that are illegal for mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives.

Big Money and Big Investment

Hedge funds are an investment opportunity reserved for the more sophisticated investor free and unimpeded by the traditional boundaries set by law for mutual funds. This allows them to accomplish aggressive investing goals. They do have a different set of restrictions such as having no more than 100 investors per fund, thus most hedge funds set extremely high minimum investment amounts, ranging anywhere from $200,000 to over $1 million. Unlike traditional mutual funds, an investment opportunity reserved for the more sophisticated investor in hedge funds pay a much higher management fee and hedge funds also collect a large portion of the profits. This cost is used to pay the money managers for their expertise. Of course, the minimums set for such funds are not within the reach of the typical investor and thus preclude the majority of individuals from participating in such investments.

Great Returns and Manageable Investment Level

An alternative investment opportunity reserved for the more sophisticated investor would be the use of a mutual hedge fund investment opportunity. These are a bit different than the traditional mutual hedge fund investment thus explained and are restricted as to where they can and cannot invest. Regulators won't let a mutual fund take on the same amount of debt risk as a hedge fund, and mutual funds can't invest as much in thinly traded shares (for example pink sheet stocks). A very unique aspect of the investment opportunity reserved for the more sophisticated investor is that mutual fund investors have the benefit of being able to get their funds out whenever they want; hedge fund investors usually have to give an extensive notice before withdrawing funds and are limited to specific times of the year.

Mutual funds in this category have management expense charges exceeding what a typical mutual fund would charge - 1.5 to 2 percent annually--far higher than the 1 to 1.35 percent for typical funds, but far less than the traditional hedge fund would charge.

Of course, the lower likelihood of risk tends to mean less opportunity for gain. Since these funds are not leveraging their investment portfolios as liberally and not engaging in risky trades their performance is not likely to be as rocket launching as the more ballyhooed hedge fund investment opportunity options. Due to this they are also not as likely to fluctuate and expose the investor to catastrophic losses. Something that has bitten the investment opportunity reserved for the more sophisticated investor private hedge fund investment options from time to time.

Where They Invest

There are different types of investment opportunity reserved for the more sophisticated investor hedge fund investment options. Common stock are securities representing equity ownership in a corporation, providing voting rights, and giving the owner of the shares an opportunity to participate in the company's success through dividends and/or capital appreciation. Often a manager of a hedge fund investment opportunity will invest in companies that are not as known and might be a bit riskier than your typical common stock investment.

An important consideration is the risk factor. As most people are aware the amount of risk associated with government backed securities (treasury bonds) is basically nil. The reason is that the United States government issues the security and backs their value. The only real risk is the United States government defaulting on their debt payments (like treasury bonds) and if that happens there would be a slew of other issues confronting the investor besides their treasury investment. I think we can assume that will never happen and we should also hope it never happens.

The risk factor for an investment opportunity reserved for the more sophisticated investor in a hedge fund like an emerging business is that the single best investment opportunity (like a small business) could fail. All of us have read the stories about fabled franchises that rise like a meteor only to fall to earth and leave investors empty handed.

The failure rate of small start up companies is high (fewer than 4 out of 10 make it beyond 3 years according to some reports) and putting funds into such a business is risky. However hedge fund investment opportunity managers usually are very savvy and understand the inherent risk thus they reduce the portfolio risk by diversifying.

Financial Growth with a Safety Net

Diversification is a concept that has evolved from being an unknown factor in the world of investing into something that is part of most individual investor’s vocabulary. Diversification is an investment strategy designed to reduce exposure to risk by combining many different investments, such as stocks, bonds, and real estate, which are not likely to increase or decrease in value at the same time. The goal of diversification is to reduce the risk in an individual’s portfolio. Volatility is limited by the fact that not all asset classes or industries or individual companies move up and down in value at the same time or at the same rate. Diversification reduces both the potential increase and the potential decrease and allows for more consistent performance under a wide range of economic conditions.

Investing in Hedge Funds and Winning

The most popular form of diversification and the easiest to understand is the use of mutual funds. Mutual funds represent a great opportunity for individuals seeking a hedge fund investment opportunity with small (or at least reasonable) outlay. Mutual funds pool money from many investors and place the money in stocks, bonds, or other securities. Mutual funds can also invest in a combination of the three. They are managed by a professional portfolio manager who actively adjusts the funds' portfolio to try to increase their value.

Any individual seeking to gain financial independence should take a look at alternative stock investment opportunities. There are many different investment vehicles that can be used as an alternative investment opportunity reserved for the more sophisticated investor and a few have been discussed in this article. The key is to remember that a stock investment opportunity is just part of an overall plan to achieve financial independence.