Quick tip: Thinking about investing in a hedge fund? Start by researching the fund's manager, investment strategies, and past performance. To be considered an accredited investor, you'll need to earn at least $200,000 in each of the last two years ($300,000 for married couples) or have a net worth of more than $1 million. The elevated risk is why only accredited investors - those deemed sophisticated enough to handle potential risks - can invest in this type of fund. "So they can make big bets on where the market's going, and they could be very wrong." "There's no transparency in hedge funds, and most of the time, managers can do whatever they want inside of the fund," says Meghan Railey, a certified financial planner and co-founder/chief financial officer of Optas Capital. For instance, the fund may borrow money to grow returns - known as leveraging - make highly concentrated bets, or take aggressive short positions.īut that flexibility also makes these investment vehicles risky, despite being called "hedge" funds. They can invest both domestically and around the world and use just about any investment strategy to make active returns. Hedge funds have a lot of leeway in how they earn money. The hedge fund will also have a minimum buy-in. Quick tip: To invest in a hedge fund, you'll need to show you've earned at least $200,000 in each of the past two years ($300,000 for married spouses) or you've got a net worth of at least $1 million. This is actually where the term "hedge" comes from, since using various market strategies can help offset risk, or "hedge" the fund against large market downturns. If one investment does well, then the other loses money - theoretically reducing the overall risk to investors. To protect against market uncertainty, the fund might make two investments that respond in opposite ways. What is a hedge fund?Ī hedge fund is a private investment that pools money from several high-net-worth investors and large companies with the goal of maximizing returns and reducing risk. But hedge funds come with some risks, which you'll need to consider before diving in.
The goal is for participants to come out ahead no matter how the overall market is performing, which may help protect and grow your portfolio over time. A hedge fund is a type of investment that's open to accredited investors.