Hedge Funds For Dummies book cover

Hedge Funds For Dummies

Published: October 30, 2006

Overview

Hedge your stock market bets with funds that can deliver returns in down markets

Hedge Funds For Dummies is your introduction to the popular investing strategy that can help you gain positive returns, no matter what direction the market takes. Hedge funds use pooled funds to focus on high-risk, high-return investments, often with a focus on shorting—so you can earn profit even when stocks fall. But there’s a whole lot more to it than that. This book teaches you about the diversity of hedge funds, their pros and cons, and their potentially lucrative role as a part of your portfolio. We also give you tips on finding a broker that is right for you and the investment you wish to make. Let Dummies be your investment advisor as you set up a strategy that will deliver results.

  • Understand the ins and outs of hedge funds and how they fit in your portfolio
  • Choose the funds that make the most sense for your unique situation
  • Build a hedge fund strategy based on tested techniques and the latest market data
  • Avoid common mistakes and identify solid funds to ensure success

This Dummies guide is for traders and investors looking to learn more about hedge funds and how they can become lucrative investments in a down market.

Hedge your stock market bets with funds that can deliver returns in down markets

Hedge Funds For Dummies is your introduction to the popular investing strategy that can help you gain positive returns, no matter what direction the market takes. Hedge funds use pooled funds to focus on high-risk, high-return investments, often with a focus on shorting—so you can earn profit even when stocks fall. But there’s a whole lot more to it than that. This book teaches you about the diversity of hedge funds, their pros and cons, and their potentially lucrative role as a part of your portfolio. We also give you tips on finding a broker

that is right for you and the investment you wish to make. Let Dummies be your investment advisor as you set up a strategy that will deliver results.
  • Understand the ins and outs of hedge funds and how they fit in your portfolio
  • Choose the funds that make the most sense for your unique situation
  • Build a hedge fund strategy based on tested techniques and the latest market data
  • Avoid common mistakes and identify solid funds to ensure success

This Dummies guide is for traders and investors looking to learn more about hedge funds and how they can become lucrative investments in a down market.

Hedge Funds For Dummies Cheat Sheet

Hedge funds use pooled funds to focus on high-risk, high-return investments, often with a focus on shorting — so you can earn profit even when stocks fall.

Articles From The Book

2 results

Funds Articles

Hedge Fund Fees to Expect with Your Investment

Hedge funds are expensive, for a variety of reasons. If a fund manager figures out a way to get an increased return for a given level of risk, he deserves to be paid for the value he creates.

One reason hedge funds have become so popular is that money managers want to keep the money that they earn instead of getting bonuses only after they meet big corporate overhead. Face it — a good trader would rather keep his gains than share them with an overpaid CEO who doesn’t know a teenie from a tick.

Almost all hedge fund managers receive two types of fees: management fees and performance fees. More than anything else, this business model, not the investment style, distinguishes hedge funds from other types of investments.

A management fee is a fee that the fund manager receives each year for running the money in the fund. Usually set at 1 percent to 2 percent of assets in a fund, the management fee covers certain operating expenses, salaries for the fund manager and staff, and other costs of doing business. The fund pays other expenses in addition to the management fee, such as trading commissions and interest.

For example, say a hedge fund has $100,000,000 in assets. It charges a 2-percent management fee, which is $2,000,000. The fund has an additional $1,750,000 in trading expenses and interest. The fund investors have to pay fees from the assets whether the fund makes money or bombs.

Most hedge funds take a percentage of the profits as a performance fee — also called the incentive fee or sometimes the carry. The industry standard is 20 percent, although some funds take a bigger cut and some take less. You need to read the offering documents you receive from a fund to find out what the fund charges and whether the fund’s potential performance justifies the fee.

If the fund loses money, the fund manager gets no performance fee. In most funds, the fund managers can’t collect performance fees after losing years until the funds’ assets return to their previous high levels, sometimes called the high-water marks.

Funds Articles

Types of Hedge Funds: Absolute-Return and Directional

You can sort hedge funds into two basic categories: absolute-return funds and directional funds. The hedge fund that you choose depends on your investment strategy.

Absolute-return hedge funds as investments

Sometimes called a “non-directional fund,” an absolute-return fund is designed to generate a steady return no matter what the market is doing.

Although absolute-return funds are close to the true spirit of the original hedge fund, some consultants and fund managers prefer to stick with the label absolute-return fund rather than “hedge fund.” The thought is that hedge funds are too wild and aggressive, and absolute-return funds are designed to be slow and steady. In truth, the label is just a matter of personal preference.

An absolute-return strategy is most appropriate for a conservative investor who wants low risk and is willing to give up some return in exchange. Hedge fund managers can use many different investment tools within an absolute-return strategy.

Investing in directional hedge funds

Directional funds are hedge funds that don’t hedge — at least not fully. Managers of directional funds maintain some exposure to the market, but they try to get higher-than-expected returns for the amount of risk that they take.

Because directional funds maintain some exposure to the stock market, they’re said to have a stock-like return. A fund’s returns may not be steady from year to year, but they’re likely to be higher over the long run than the returns on an absolute-return fund.

Directional funds are the glamorous funds that grab headlines for posting double or triple returns compared to those of the stock market. The fund managers may not do much hedging, but they have the numbers that get potential investors excited about hedge funds.

A directional strategy is most appropriate for aggressive investors willing to take some risk in exchange for potentially higher returns.