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How do I Choose the Best Hedge Fund Funds?

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  • Written By: Angela Johnson
  • Edited By: Amanda L. Wardle
  • Last Modified Date: 26 January 2020
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Hedge fund funds can increase diversity in an investor's portfolio. When choosing the best hedge fund funds, it is important to consider funds that differ in terms of investment strategy. Each individual fund in the hedge fund is managed by an investment manager, and each may practice a different investment strategy. Other important factors to consider include the fund's historical performance, its rate of return, and any fees associated with the fund.

Using a diverse set of funds to invest into a hedge fund portfolio allows more stability than one hedge fund alone can offer. Investing in a single hedge fund can be risky, because if that fund yields low returns or, even worse, crashes, no other funds will be available to balance the loss. If several different funds are used in a portfolio, those funds which are performing poorly will be balanced out by those performing well.

Much like mutual funds, hedge fund funds allow the investor to spread their risk across the fund pool in order to raise the possibility for yielding a positive overall net asset value. That is where the similarity between mutual funds and hedge funds ends, though. Hedge funds are limited to high net worth investors and generally require a high minimum investment.

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Fees are an important consideration in choosing the best hedge fund funds. Common fees include performance fees, fees per fund, and overall hedge fund management charges. Performance fees can actually be positive, as they motivate the hedge fund manager to take risks and yield a possible higher profit.

Hedge funds can include investments in anything from commodities and art to real estate. Each fund has its own risk factors according to inflation and the economic climate at the time. Economic forecasts can typically predict where the market will be in the near future; however, mergers and sudden market crashes may pose unforeseeable risks.

Hedge funds are not required to register with the Securities and Exchange Commission (SEC). The funds which are registered with the SEC are required to provide their investors with a prospectus as well as quarterly reports which must be filed with the SEC. Choosing these funds can offer the regulations that are overseen by the SEC. Some fund managers and investors find this to be comforting when choosing the right hedge fund funds.

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