Although mutual funds stick to stocks, hedge funds can invest in a variety of other assets. These include alternative assets like land and real estate, derivatives, and currencies. They also invest in commodities and other financial instruments. Mutual funds stick to stocks, but hedge funds typically use borrowed money and are exposed to more risk. For example, during the subprime meltdown, hedge funds were hard hit because of their large amount of leverage and reliance on collateralized debt obligations.
While indices play a key role in traditional asset markets, they are much more problematic in hedge funds. For instance, while equity index fund products give investors access to the majority of developed markets, hedge fund indices are much more difficult to determine. Also, a typical hedge fund is not traded on an exchange, and will accept investments at its discretion without publishing returns. The primary problem with indices is that they do not reflect the full universe of hedge funds, so they tend to underrepresent the larger managers.
Since the early days of the hedge fund industry, they have become a huge part of the financial system. The industry was founded in 1949 and has grown to $3 trillion in assets under management. The industry is largely dominated by institutional investors, though many individuals benefit indirectly from hedge fund investments. For example, there are a number of different types of hedge funds, which are categorized by their strategies. The goal of these funds is to increase the total amount of assets under management, but at the same time, minimize the amount of risk that investors take on.
In recent years, hedge funds have benefited from regulatory arbitrage and capital requirements. As a result, margin requirements on stocks tend to be diluted. Increasing the amount of collateral hedge funds must post could help reduce the risk of distressed sales. Hedge funds could be subject to capital risk surcharges and capital weights. A third type of capital regulation would focus on regulating hedge funds. The U.S. President’s Joint Task Force has recently called for quarterly hedge fund portfolio disclosures to regulators and bank creditors. Although the public disclosure does not necessarily improve oversight, it is likely to put pressure on banks to limit the leverage of their clients.
While most investors think of hedge funds as “risky”, most are not. Despite their reputation, hedge funds have historically outperformed both equity and bond indexes, and some have even been better performers than equities. Hedge funds are favored by sophisticated investors who have been through major stock market corrections. Indeed, many pension funds and endowments allocate assets to hedge funds. This is because they can reduce their overall risk and minimize their volatility, while allowing them to enjoy higher returns.
Before investing in hedge funds, you should be aware of the requirements for becoming an investor. Hedge funds are only open to accredited investors – those with a net worth of more than $1 million. Accredited investors should also be financially stable and have a good reason to maintain their income level. They should also have an investment objective, which is usually based on the fund’s strategy. They also need to have experience and knowledge of the financial industry.