11 May Can regular investors get into hedge funds?

Q. I’m hearing a lot about hedge funds making a lot of money. Is that something a regular investor can get into?
— Investor

A. Hedge funds get a lot of headlines for volatile returns, both on the upside and the downside.

They’re not for the faint of heart.

These investments can take a very aggressive approach to investing by using alternative asset classes, private companies, real estate, currencies and commodities, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge.

They are also often highly leveraged, she said.

“They are privately owned and generally require seven-figure initial investments,” she said. “In addition, those who wish to participate in a hedge fund usually must meet the Security and Exchange Commission’s definition of an accredited investor. This means the individual has a net worth of more than $1 million or income of more than $200,000.”

Unlike mutual funds or exchange-traded funds that have expense ratios that primarily cover the operating overhead, hedge funds have performance-based fees, she said. Often called “2 and 20,” hedge funds collect 2% of the asset value for administrative fees and can receive up to 20% of those assets based on how the fund performs or the addition of new investors, Mott said.

“While many of the largest hedge funds are not available to individuals, there are firms that have opened up private equity opportunities for accredited investors who also have sizable investment portfolios, Mott said. “As an alternative, there are mutual funds and exchange-traded funds that are designed to track the strategies of hedge funds.”

She recommends you should speak to an investment professional to determine whether this type of risky asset will fit into your portfolio and help you meet your goals.

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This story was originally published on May 11, 2022.

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