Hedge funds are sometimes the highest-earning investment vehicles, and sometimes they do that much worse than everything else.
They have a high buy-in, low transparency, and limited liquidity. There are also other advantages and disadvantages worth mentioning. A good hedge fund can provide you with an excellent diversification of your investable assets and give you exposure to the best and brightest money managers in the world.
They take enormous fees out for the work they do, but it may be your best shot at beating the market anyway. Hedge fund managers tend to take larger risks than, let’s say, mutual fund managers, and this can cause them to be hit harder than other investments when things don’t go as planned.
They also may not give you as much liquidity as you’d like. You can only make redemptions at certain intervals, such as once a quarter or once a year, and that may mean you have to sit on your hands while things go south.
Because hedge fund managers have a license to do pretty much whatever they want with a very large sum of money, it can be a very productive venture if the manager is able to navigate the markets well.
In mutual funds and other pooled investments, mangers are confined to the strategies set forth in the prospectus, and this sometimes forces mutual fund managers to sit on their hands while hedge fund managers are really throwing their backs into generating alpha.
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