What You Need to Know About Hedge Funds Before You Invest

Thinking of investing in a hedge fund to “hedge” your bets? While hedge funds may be attractive to you, they may not be an option. Hedge funds are private investment partnerships with minimal regulatory oversight, which depending on your point of view, may be a good or a bad thing. This lack of regulatory oversight and the private investment nature of hedge funds means this: not everyone can invest.

According to About.com’s Investing for Beginners page, hedge funds are difficult for new investors to invest in for several reasons: limited opportunities due to several SEC regulations, they are not advertised, hedge fund partners can accept or reject potential investors for any reason, and large initial investment requirements.

As if those hurdles aren’t already difficult to overcome, it’s not always clear what exactly a hedge fund is. According to FBI.gov’s Hedge Fund Information for Investors page, the term “hedge fund” is a generic, rather than specific legal term. It is used to describe an investment vehicle that has a great deal of flexibility in its investment strategies.

Not only that, the FBI points out that the lack of SEC regulatory scrutiny could lead to fraud by hedge fund managers. As with any type of securities, fraud is a concern for investors.

If you determine that investing in a hedge fund makes sense for you, and you qualify to invest in one, the FBI recommends performing due diligence before investing. Examples of due diligence include:

  • Criminal background check of the hedge fund manager
  • Checking court records
  • Checking the SEC website for regulatory actions
  • Making sure the hedge fund is audited annually by a reputable and independent accounting firm

Hedge fund aren’t inherently good or bad. They’re simply a type of private, pooled investment that requires careful consideration before handing over your hard-earned dollars.

Sources:
1. About Money, “Investing in a Hedge Fund Can Be Difficult,” read more
2. FBI.gov, “White Collar Crime: Hedge Fund Information for Investors,” read more.

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