Hedge funds are open to a limited class of investors. It requires a huge amount of investment when you go for investing in hedge funds. They are privately-owned investment funds and hence they are not regulated like mutual funds. This article provides you with information about the basics you must know while investing in hedge funds.

Structure of hedge funds

Hedge fund helps to hold and invest money of its investors. It only has its investment portfolio and cash and does not have any employees or assets. The investment manager is in the overall charge of the portfolio and he also has employees under him. However, along with investment manager, the functions of the hedge funds are also conducted by several service providers. The most common service providers are explained below.

1. Administrator – The administrator helps to manage back office related work, deals with issue and redemption of interests and shares. Administrators also help to calculate the net asset value of fund.

2. Distributor – The distributors help in marketing the fund among the potential investors.

3. Prime broker – Prime brokers help to lend money, lend securities in case of short selling, they also help in trade execution and also provide help for clearing and settlement.

Characteristics of hedge funds

Here are some of the characteristics you need to know before investing in hedge funds.

1. Vary in investment returns – Most hedge funds vary a great deal in terms of investment returns, volatility and risk. But some may not be affected at all by the downturns in the market.

2. Consistency of returns – Many hedge funds focus on consistency of returns and capital preservation rather than providing you with huge returns.

3. Non-market correlated returns – Many hedge funds also provides you with non-market correlated returns.

4. Managed by experienced – Hedge funds are managed by experienced and sincere investment professionals.

5. Minimizes overall portfolio volatility – The investors of hedge funds are usually private banks, insurance companies, affluent individuals and families. This helps to minimize the overall portfolio volatility and thus, ensures returns.

Before investing in hedge funds you must know that all hedge funds are not the same. Investment returns, volatility, and risk vary a great deal among different hedge fund strategies. Thus, you must be careful while choosing the hedge fund that you want to invest in so that it may provide you the best return you want.