16 Oct Are hedge funds only for rich people?

Q. You always hear about hedge funds and rich people and politicians. How do these funds work and are they only for rich people?
— Not rich

A. Hedge funds are pretty complicated, and they’re often not open to all investors.

These are generally only open to “Accredited Investors” who have a high minimum net worth and/or high income, said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton.

“They are unregulated by the SEC and can invest in all sorts of strategies such as stocks, bonds, real estate, currencies, etc.,” he said “They can bet with the market or against the market, and then can leverage their investments by borrowing money in some cases.”

And, Lynch said, they can do things that normal mutual funds generally can’t do — and that can be good or bad.

Lynch said hedge funds usually have fees known as “2 & 20,” which translates into a 2 percent annual expense fee plus 20 percent of the profits above certain benchmarks. That makes hedge funds in general rather expensive, he said.

Are they worth it?

That depends.

“They can definitely do things that traditional money managers cannot do,” Lynch said. “The question is always, ‘Is it worth the added cost?’ and really only time will tell on that.”

He said for very large pension funds, hedge fund positions can add a level of diversity not available in traditional markets.

But for regular investors?

You can find some hedge-like mutual funds with minimum investments of $10,000. Just make sure you have a diverse portfolio whose asset allocation has a place for such an investment.

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This post was originally published in October 2017.