Welcome to the wild, wild west. Have you heard about the Canarsie Hedge fund? More money was lost in three weeks than most of us will see in our entire lifetimes. How did this happen and why? The P4Capital team examines this in this week’s Round Table Discussion.
AN INTEGRAL PART OF A GOOD INVESTMENT STRATEGY?
Hedge Funds have over the years gained a bad rep and a lot of negative media publicity, but experts argue that they are excellent investment vehicles and can be an integral part of a well balanced investment portfolio.
A case in point, is the recent survey conducted by AIMA and Barclays which showed an increased partnership between hedge fund managers and investors. The market has grown to $2.2 trillion in 2012 from only $450 billion in 1999.
So what exactly, is a hedge fund and why is it an attractive proposition?
Hedge fund is a pooled investment vehicle that uses complex investment strategies with the goal of maximizing returns while hedging the risk for its investors.
So the two most obvious reasons often cited in favour of hedge funds include their ability to reduce risk exposure and enhance returns. In the case of risk exposure, hedge funds that offer stable returns definitely contribute to portfolio stability when on the other hand traditional investment options are highly volatile. As far as maximizing returns is concerned, hedge funds can contribute to this in 2 separate ways. Consider, the option explained above, where low volatility hedge funds offer relatively guaranteed additional returns compared to traditional investment vehicles. The second scenario, a more riskier option is when hedge funds are a part of highly volatile environments, but in turn garner high returns e.g. commodity trading advisor’s can generate very high returns.
While the thought of high returns maybe far too appealing for us to start investing in hedge funds, there are a few things to consider – hedge funds are typically open to only accredited investors or require a minimum amount e.g. In Ontario, you need $150,000 to invest in a fund. Other risks associated include; information is not public- hedge fund firms are mostly privately held and guard their investment strategies closely. Funds lack liquidity, since firms offer redemption only at certain times during the year.
In conclusion, the overall risk/return ratio of the portfolio should be analyzed thoroughly before including hedge funds into the mix.
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