Hedge funds are alternative investment schemes set up and run by limited liability companies or partnership firms. These businesses appoint a professional fund manager to collect money from accredited investors on their behalf. They are commercial banks, insurance companies, wealthy families, individuals with a high net-worth, and custodians of endowment funds. The manager invests their money in a diverse range of financial assets. These include derivatives, collectibles, equities, real estate, bonds, convertible securities, and foreign currencies. In doing so, this professional use complex portfolio-building, trading, and risk management techniques to:
- Maximize the investors’ net returns while minimizing their potential risks, and
- Protect the investors’ funds from uncertain volatile market fluctuations.
Scott Tominaga is an investment specialist and former FINRA regulator from America with a bachelor’s degree in business finance. His area of expertise is in accounting, financial compliance, administrative and back-office operations. He has over 25 years of experience in the brokerage and alternative investment schemes. Presently, he is the Chief Operating Officer of PartnersAdmin LLC.
He explains many investors might want to invest in hedge funds to earn attractive after-tax returns. In the process, they also may be in a position to increase their wealth over time. However, the investors need to fulfill the following stringent conditions to participate in these investment schemes:
- Provide documents proving their annual net worth exceeds one million dollars,
- Submit copies of their annual tax returns showing their yearly income is in excess of $2,00,000, and
- Own equity in financial assets that exceed five million dollars, excluding their residential or business properties.
Investors even have to fill up a lengthy questionnaire before fund managers can accept their money. This rule is in accordance with the investor protection guidelines of the U.S. Securities and Exchange Commission. In this document, they have to disclose details of all their personal financial assets. These include their equity stocks, physical commodities, real estate properties, futures contracts, and swaps.
Popular hedge fund strategies
Investors should be aware of the following hedge fund strategies hedge managers use to increase their wealth:
- Distressed debt strategy that involves the buying corporate bonds or overdue bank debts of companies on the verge of liquidation,
- Buying of company shares whose prices are likely to inflate due to specific corporate events,
- The capital structure where they exploit the price discrepancies of securities in a company’s balance sheet, and
- A directional strategy whereby the managers bet on and buy investments according to probably market trends or inconsistencies.
Scott Tominaga sums up by saying investors can increase their wealth exponentially by investing in hedge fund investment schemes. In doing so, they do not have to incur huge financial risks. Moreover, these investment schemes have adequate safeguards to protect their portfolio from volatile market fluctuations. However, investors need to carefully read the prospectus of hedge fund schemes they are keen on investing in. This ensures they get a better understanding of the terms and conditions of the investments. The investors should scrutinize the clauses relating to the manager’s commission, fees payable, fund size, and investor protection.