An
Introduction to Hedge Funds
I. Introduction
The term hedge
fund usually refers to private investment vehicles that seek above-average
returns through active portfolio management. Hedge funds tend to
be skill-based investment strategies that attempt to obtain returns
based on the unique skill or strategy of the trader. These returns
are considered "absolute," as they do not depend on the relative
long-term return of underlying traditional stock and bond markets.

Note: Stocks offer substantially greater liquidity and transparency than the alternative investment products noted and may be less costly to purchase.
Source:
Hedge Funds: HFR Index; U.S. Stocks: S&P 500 Index and
NASDAQ Index;
Intl. Stocks: MSCI World Index
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Investors are
attracted to hedge funds for a variety of reasons. This includes
their potential to deliver positive returns under all market conditions,
low correlation to traditional asset classes, and access to highly
specialized strategies not typically available through traditional
money management.
Hedge funds
are largely unregulated by U.S. security laws and are strictly prohibited
from advertising. As a result, hedge funds today are offered as
private investment partnerships, generally with fewer than 100 affluent
investors or institutional clients. Not all hedge funds are appropriate
for all prospective investors: most hedge funds are available only
to persons who meet specific financial requirements. Prior to investment,
the law requires that the hedge fund determine the investor's suitability
(i.e. is the hedge fund appropriate to the investor's risk tolerance,
investment goals, and investment experience).
II. Benefits
A primary benefit
of hedge funds is the low correlation many strategies have to traditional
investments. While past performance is not indicative of future
results, hedge fund strategies historically offer returns independent
from the performance of stock and bond markets. In fact, they aim
to diversify away from traditional "long-only" equity strategies
and deliver positive returns under all market environments.
III. Risks
When considering
alternative investments, including hedge funds, you should consider
various risks including the fact that some products: often engage
in leveraging and other speculative investment practices that may
increase the risk of investment loss, can be illiquid, are not required
to provide periodic pricing or valuation information to investors,
may involve complex tax structures and delays in distributing important
tax information, are not subject to the same regulatory requirements
as mutual funds, often charge high fees, and in many cases the underlying
investments are not transparent and are known only to the investment
manager.
IV. How
To Invest
With an estimated
6000 hedge funds managing in excess of $550 billion, most investors
today are questioning where to begin. Many investors attempt to
conduct their own due diligence and invest directly with specific
managers, while others take advantage of professional hedge fund
consultant firms to research, advise and monitor their investments.
Investing with
a hedge fund manager involves a complex evaluation process. Identifying
the best managers can be very difficult. Hedge fund managers are
not required, and in many cases not allowed, to advertise or report
performance data to any central authority. As a result, many of
the top hedge fund managers are not listed in commercially available
databases.
Hedge fund consultants
can greatly assist in this process. Research specialists, with access
to this data, screen the universe of hedge funds in search of high
quality candidates for further analysis. They perform qualitative,
on-site evaluations and review a manager's background, financial
statements and corporate documentation in an attempt to identify
a competitive advantage. This process often includes a quantitative
review focused on the performance statistics related to volatility,
consistency, and peer comparisons.
Consultants
help investors define their investment profile and offer their clients
a unique range of comprehensive hedge fund solutions. They then
help clients monitor their investments to compare performance with
their original investment parameters. They may advise a client to
redirect their investment allocations as a result of changing market
conditions, some asset classes outperforming others, or a change
in the investor's objectives.
V. Conclusion
While there
are risks involved, and hedge funds are not suitable for all investors,
there is a compelling argument for the inclusion of hedge funds
in a traditional investment portfolio. Many hedge funds can offer
enhanced portfolio performance under various market conditions.
It is hedge fund managers' flexibility and skill-based strategies
that make this investment class inherently attractive. However,
investors need to approach these investments with the necessary
information to make an informed decision. Researching and evaluating
hedge funds presents a host of challenges to even the most sophisticated
investor. Through an appropriate allocation, hedge funds can be
an attractive addition to a well-diversified portfolio designed
to deliver positive returns while attempting to reduce volatility
and risk.
Note:
The NASDAQ, S&P 500 and MSCI indices are unmanaged and are generally
representative of certain portions of the U.S. and international
equity markets. These indices are mentioned for illustrative purposes
only and are not indicative of any fund's performance. An investor
cannot invest directly in an index. Moreover, indices do not reflect
commissions or fees which might be charged to a similar fund and
which might materially affect the performance data presented.
John Mauldin is the President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS) an FINRA registered broker-dealer. MWS is also a
Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered
with the CFTC, as well as an Introducing Broker (IB). Millennium Wave
Investments is a dba of MWA LLC and MWS LLC. Millennium Wave Investments
cooperates in the consulting on and marketing of private investment offerings
with other independent firms such as Altegris Investments; Absolute Return
Partners, LLP; and Plexus Asset Management. Funds recommended by Mauldin may pay a portion of their fees to Altegris Investments who will share 1/3 of those fees with MWS and thus to Mauldin. For more information please see "How does it work" within this website. This website and any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an endorsement or inducement to invest with any CTA, fund or program mentioned. Before seeking any advisor's services or making an investment in a fund, investors must read and examine thoroughly the respective disclosure document or offering memorandum. Please read the information under the tab "Hedge Funds: Risks" for further risks associated with hedge funds. |