High-End Investments: Foreign Currency Trading and Hedge Funds - dummies

High-End Investments: Foreign Currency Trading and Hedge Funds

You can put your money in high-end investment vehicles, such as foreign currency trading (or forex) and hedge funds. High-end investing involves not so much investing (buying and holding on) as it does trading or speculating — assuming a business risk with the hope of profiting from market fluctuations.

Foreign currency trading

When you get involved in foreign currency trading (sometimes called forex trading), you’re essentially speculating on the value of one currency versus another. You “buy” a currency just as you’d buy an individual stock, or any other financial security, in the hope that it will make a profitable return.

But the value of your security is particularly volatile because of the many factors that can affect a currency’s value and the amazingly quick timeframe in which these values can change. Nevertheless, if you’re an active trader looking for alternatives to trading stocks or futures, the forex market is hard to beat.

Trading foreign currencies is a challenging and potentially profitable opportunity for educated and experienced investors. Before deciding to participate in the forex market, carefully consider your investment objectives, level of experience, and risk appetite. Most important, don’t invest money you can’t afford to lose.

Investing in hedge funds

In a nutshell, hedge funds are lightly regulated private partnerships that pursue high returns through multiple strategies. A hedge fund manager may invest in almost any opportunity in the market where he or she foresees favorable risk to reward. Through hedge funds, you can net some high returns for your portfolio — if you don’t mind the risk and have a lot of money to invest.

Because of the risk and the investment criteria, hedge funds aren’t open to most investors. In fact, to participate, you have to meet strict limits put in place by the Securities and Exchange Commission regarding your worth (a net worth of at least $1 million and/or an annual income exceeding $200,000 in each of the two most recent years).

A hedge fund differs from so-called “real money” — traditional investment accounts like mutual funds, pensions, and endowments — because it has more freedom (read: little to no regulatory oversight) to pursue aggressive investment strategies, which can lead to huge gains or huge losses.