Hedge Funds as an Alternative Investment

There is a lot of talk in the media about hedge funds -- lots of it hype, lots of attention to the ones that go bust.

Hedge funds in general can be a great place to put money. By U.S. law, one has to be an "accredited investor" in order to have access to a hedge fund. Hedge funds are not subject to as many rules and regulations as mutual funds so there is a lot more flexibility involved in the strategies they can employ. On the other hand, that flexibility can sometimes involved risk, so it is more important that one does a lot of due diligence when choosing this as an investment.


Many hedge funds strive for zero correlation with other asset classes, while still creating positive return above and beyond the market, or alpha. Obviously a non-correlated, high performing asset class is incredibly handy for leveling out the "dips" in your equity curve if you own more traditional assets such as stocks and bonds.


Hedge funds apply a variety of strategies with attractive returns that are independent of traditional stock and bond investments: these include merger/arbitrage, long/short (they can sell stock they don't own), relative value investing, and trend following strategies. They can buy commodities, mortgages (even sub-prime mortgages!), collectibles, real estate -- and anything you can think of.



Hedge funds may or may not be risky -- much of that depends on how much leverage they use; by that do they invest using borrowed money, or margin (controlling a larger amount of the asset with a small amount of money put down). Beware of those that use margin -- it is a double edges sword; on the other hand hedge funds that don't use margin may be less risky in many cases than their mutual fund competitors.