Hedge Fund Investment: Best Places For Your Money

Hedge funds are complex investment vehicles that use advanced portfolio management techniques and cater to high-net-worth individuals and institutional investors. They are designed to deliver high returns and employ a wide range of risky strategies to achieve their financial goals. With market volatility on the rise, hedge funds are becoming increasingly attractive to investors due to their ability to profit from valuation discrepancies across various financial assets and markets.

This introduction sets the context for exploring the best hedge funds to invest in, considering their performance, investment strategies, and ability to navigate the dynamic market conditions.

Best Hedge Funds to Invest In:

Hedge fund fees and minimums

Hedge funds are not for the faint of heart—or the shallow of pocket. Minimum initial investments range from $100,000 to upwards of $2 million. And that's just to get in the door. Once you're inside, you'll find that hedge funds also carry hefty fees. Typically, they charge an asset management fee of 1% to 2% of the amount you have invested, plus a performance fee that is equal to 20% of the hedge fund's profit. All of these fees can eat into your overall return.

It's worth noting that hedge funds are not as liquid as stocks or bonds. Your money may be tied up for a certain amount of time, or you may only be able to withdraw during set periods in the year.

These funds are also not for the impatient. Due to their aggressive investment strategies, they are designed to produce returns regardless of market conditions. But this means they can underperform the market over time. From 1980 through 2008, for example, hedge funds averaged returns of 6.1% after fees, according to the Journal of Financial Economics. During that same period, the S&P 500 rose 12.5% each year on average.

However, hedge funds can be a smart way to diversify your portfolio and hedge against market volatility. If you qualify as an accredited investor and are willing to invest hundreds of thousands of dollars—or even millions—at once, then investing in hedge funds may be a good option.

Historical hedge fund performance

Hedge funds have historically underperformed stock market indices. From January 2009 to January 2019, hedge funds only beat the S&P 500 in a single year: 2018. That year, the S&P 500's losses were slightly worse than those of hedge funds, with the index losing 4.38% compared to the hedge funds' loss of 4.07%.

In 2019, hedge funds returned an average of 6.96%, while the S&P 500, the Dow Jones Industrial Average, and the NASDAQ grew by 28.9%, 22.3%, and 35.2% respectively. This trend is supported by historical data from 1980 to 2008, which shows that hedge funds averaged returns of 6.1% after fees, while the S&P 500 rose by 12.5% on average annually.

Despite this, hedge funds remain an attractive investment vehicle for high-net-worth individuals due to their ability to generate returns regardless of market conditions. The goal of hedge funds is not to outperform the market indices but rather to provide growth during both bull and bear markets.

Some of the best-performing hedge funds in 2024 include Bridgewater Associates, Millennium Management, Renaissance Technologies, and Farallon Capital Management. Bridgewater, founded in 1975, has generated one of the most successful track records in the industry and has $112.5 billion in assets under management as of December 31, 2023. Renaissance Technologies, founded in 1982, generated astonishing returns with its Medallion Fund, which grew at a compound annual growth rate of 62% between 1988 and 2021.

Hedge funds employ a wide range of investment strategies and aim to outperform traditional investment vehicles. They invest in various asset classes, including stocks, bonds, commodities, currencies, derivatives, and alternative assets. Due to their risky nature and the potential for high returns, hedge funds are typically only accessible to accredited investors, institutional investors, or high-net-worth individuals.

Who can invest in hedge funds?

Hedge funds are not for the average investor. Due to their high minimum investments, they are only accessible to high-net-worth individuals, pension funds, and institutional investors. In the US, to be considered an accredited investor by the Securities and Exchange Commission (SEC), an individual must have a net worth of at least $1 million, excluding their primary residence, or an annual income of over $200,000 ($300,000 if married).

This definition of an accredited investor has not been updated since the 1980s, and as of 2020, those demonstrating advanced investing knowledge through qualifying work experience or financial licenses can also become accredited investors, even if they don't meet the financial requirements.

However, even with this expanded definition, only about 4% of US households earned more than the $300,000 necessary for a family to reach accredited investor status in 2019. This means that only a small fraction of the population qualifies to invest in hedge funds.

Hedge funds are also not registered or regulated in the same way as traditional investment vehicles like mutual funds. They are subject to less regulatory oversight and may not be required to file reports with the SEC. This is another reason why hedge funds are only suitable for investors who understand the risks involved.

The high minimum investments, complex strategies, and high fees of hedge funds mean that they are not a suitable investment for most people. For those looking to grow their wealth, investing in index funds that track major indices is likely a better option.

How to invest in hedge funds

Hedge funds are not for the faint of heart—nor are they for the average investor. They are complex, risky, and highly exclusive investment vehicles.

If you are one of the few who can afford to invest in hedge funds, here is a step-by-step guide on how to do so:

Step 1: Find a Financial Advisor

Discuss your investment goals with a financial advisor. They can provide valuable guidance and help you navigate the complex world of hedge funds.

Step 2: Research Funds

Not all hedge funds are created equal. Research and compare different funds to find those that align with your investment goals and risk tolerance. Look into the fund managers' qualifications, investment strategies, and historical performance.

Step 3: Contact Hedge Funds

Once you have identified potential hedge funds, contact them directly to inquire about their minimum investment requirements and other relevant details.

Step 4: Verify Accredited Investor Status

To invest in hedge funds, you must be an accredited investor. This typically means having a high net worth (excluding your primary residence) or a high annual income. The specific criteria may vary by fund and jurisdiction, so be sure to review the applicable regulations.

Step 5: Provide Documentation

To verify your accredited investor status, you will likely need to provide documentation of your income, assets, debts, and investment experience. Have these documents confirmed by a licensed third party, such as a financial institution or an investment lawyer.

Step 6: Monitor and Diversify

Hedge funds are highly volatile and risky. Regularly monitor your investments and consider diversifying your portfolio to manage risk. Remember that even the best hedge funds can experience significant losses.

Example Hedge Funds to Consider

• Blackrock Advisors
• Citadel LLC
• Bridgewater Associates
• AQR Capital Management
• Man Group PLC
• Renaissance Technologies
• D. E. Shaw & Co.
• Tiger Global Management
• Two Sigma Investments LP
• Millennium Management

How to invest like a hedge fund

Hedge funds are alternative investment vehicles that pool money from investors to buy securities or other types of investments. They are designed to achieve high absolute returns, regardless of market conditions, and they employ a wide variety of risky investment strategies to do so.

Diversification

Hedge funds cover all sorts of asset classes, so fund managers employ complex diversification strategies. They invest in any type of asset, including real estate, art, and currency, which traditional investment vehicles like mutual funds do not have access to.

Short-Selling

Hedge funds can employ short-selling as part of their strategy. This involves selling borrowed stock with the hope of buying it back at a lower price in the future. This is a risky strategy as there is no limit to how high a stock price can go, and the potential losses can be infinite.

Leverage

Hedge funds can use borrowed money to increase the size of their investment and, therefore, the potential gains. This is another risky strategy as it can amplify losses as well as gains.

Arbitrage

Arbitrage is a common strategy used by hedge funds to take advantage of price differences between identical or similar financial instruments. This can include merger arbitrage, where a hedge fund will buy the stock of a company that is being acquired and simultaneously sell the stock of the acquiring company.

Hedging

Hedge funds will often take long and short positions in various asset classes to profit regardless of market direction. For example, going long on defensive stocks in a rising interest rate environment while shorting more sensitive stocks.

Active Portfolio Management

Hedge funds are actively managed, meaning they make tactical shifts in response to market conditions. This is in contrast to passive investing, which simply tracks an index.

Fees

Hedge funds charge performance and management fees, typically following the "two and 20" approach. This means they charge a management fee of around 2% of the assets under management and a performance fee of 20% of the fund's profits. These fees can eat into overall returns, so it is important to consider them when investing.

It is important to note that investing in hedge funds is not suitable for everyone. They are typically only available to accredited investors with a high net worth and the ability to invest large sums of money. Additionally, hedge funds are complex and risky investments, and it is important to conduct thorough due diligence before investing.

Frequently asked questions