A hedge fund is an alternative private investment pool where accredited, and institutional investors contribute large sums of money. They then use the funds to trade in a diverse range of liquid assets in the market. These assets can be real estate, foreign currencies, rare works of art, commodities, derivatives, and land. The financial assets cannot be convertible into cash in a short time. The investors then appoint a professional investment specialist known as a fund manager to oversee the hedge funds. During the trading process, this expert uses complex risk management, debt-investing, and portfolio-construction strategies. The objective is to maximize the investors’ returns while minimizing their potential risks.
Scott Tominaga– Can small investors invest in hedge funds?
Scott Tominaga is an investment specialist from Carlsbad, California, with over 20 years of valuable experience in the financial sector. He is a business finance graduate from Arizona State University and specializes in hedge fund investing. Throughout his career, he has held important positions in many credible financial enterprises in America. These include Principal, Compliance Officer, Senior Compliance Examiner, Controller, Managing Director, Chief Financial Officer, and Director of Operations. Currently, he works as a Chief Operations Officer at PartnersAdmin, LCC.
He goes on to say that small investor can invest in suitable hedge fund schemes of their choice. However, to do so, they need to meet the following minimum eligibility criteria, which the Securities and Exchange Commission (SEC) stipulates:
- Their net worth should exceed $1 million, excluding the value of any primary residence they own or
- Their annual income should exceed $2,00,000 for at least two consecutive calendar years.
In the case of small investors who are married, their annual income for the past two years should be more than $3,00,000. They then are known as ‘’accredited investors”. However, they should know that hedge funds are riskier than conventional investment schemes.
Common hedge fund strategies
Investors who meet the eligibility criteria also need to know common hedge fund strategies the fund manager adopts. These are as follows.
- Distressed debt strategies which involve investing in corporate bonds, stocks, and banks debts of companies facing a liquidity crisis,
- Event-driven strategies involve the fund manager investing in the increase in stock prices of companies undergoing a merger or reorganization,
- Global macro is a strategy whereby the managers make investment decisions according to prevailing economic growth trends in foreign countries,
- Capital structure strategies involve taking advantages of price discrepancies in debt and the equity of a single company’s capital structure, and
- Arbitrage strategies refer to the involvement of the fund managers capitalizing on the price differences between closely related investment schemes.
Scott Tominaga concludes by saying it is important for small investors to conduct a comprehensive appraisal of hedge fund schemes that interests them. First, they should ask for and thoroughly read the funds’ prospectus. This document will inform them of the nature of their involvement, risks, and time for redeeming their shares. They should even get to know the process of evaluating financial assets under the schemes and their management fee liability. Above all, they should conduct proper research on fund managers running the hedge funds before taking it up.