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How Individual Investors Can Make Direct Investments In Hedge Funds


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hedge fund

If you are wondering how individual investors can make direct investments in hedge funds or if it is even possible, then read on.  For decades the $3 trillion hedge fund industry has been exclusively accessible by wealthy accredited investors who had to pony up millions of dollars to invest in hedge funds.  Originally set up as a way to hedge a portfolio of stock holdings against stock market risk, the hedge fund industry has evolved into an insiders club of savvy investment professionals and wealthy investors seeking to outperform the stock market averages.

Up until recently, individual investors were shut out of the club.  This is no longer the case.  Hedge funds are now available that are accessible to individual investors with tens of thousands, rather than millions of dollars to invest.  Boutique investment firms have begun offering hedge fund products that individual investors with modest amounts of money to invest can afford to invest in.

How Individual Investors Can Make Direct Investments In Hedge Funds

covestor

A website called Covestor.com is leading the way by providing access to several hedge fund products that are specifically designed to accept investments ranging from $10,000 to $100,000, which puts them within reach of many individual investors that have modest amounts of money to invest.

The Clearbrook Capital Advisors Undervalued Opportunities hedge fund utilizes an investment strategy that is designed for investors that want concentrated exposure to stocks.  The fund uses a long-short equity investment strategy, meaning the fund can go long or short stocks.  This is in contrast to most mutual funds or Exchange Traded Funds (ETFs) that are either exclusively long or exclusively short-oriented.  Long means investing in stocks anticipating they will appreciate in value, while short means short selling stocks that the fund thinks will fall in price.
Clearbrook Capital

The fund’s goal is to utilize the long-short strategy and leverage to outperform the annualized returns of the Standard and Poors 500 Index (S&P 500) Index when an investment is made for many years.  Although it is young and has not yet had a chance to prove itself over a long period of time, the Undervalued Opportunities hedge fund is off to a good start, outperforming the Standard and Poors 500 Index by wide margin in 2012 and 2013 (44.8 percent gains in 2012 versus S&P 500 gains of 16.0 percent and 140 percent gains in 2013 versus S&P 500 gains of 32.4 percent).  So far in 2014, the hedge fund is underperforming the Standard and Poors 500 Index by about 2.5 percent.

A minimum $20,000 investment is required using a margin account to invest in the Undervalued Opportunities hedge fund.  The annual maintenance fee is 2 percent.

The Macro Yield hedge fund is focused on income generation and capital preservation.  The fund achieves its objectives by holding fixed income securities, common stocks, and preferred stocks that generate yield, also known as interest payments or dividends.  The fund uses structural, market, and macroeconomic analysis.  To achieve above-average returns, the fund seeks stocks that the fund managers consider to be mispriced due to spinoffs, restructurings, mergers, or Initial Public Offering (IPOs).

The Macro Yield hedge fund implements its long-short investment strategy by purchasing inverse Exchange Traded Funds (ETFs) when the fund’s research determines that the stock market is overvalued and could sell-off.  It also uses its long-short investment strategy to protect against unforeseen macroeconomic and geopolitical events that could cause the stock market to decline.  Inverse Exchange Traded Funds (ETFs) are designed to rise in price as the stock market falls in price.

The Macro Yield hedge fund is not performing very well since it was introduced in 2013, underperforming the Standard and Poors 500 Index by more than five percent during 2013 (27.2 percent gains in 2013 versus S&P 500 gains of 32.4 percent).  So far in 2014, the hedge fund is underperforming the Standard and Poors 500 Index by about 1.5 percent.

A minimum $100,000 investment is required using a margin account to invest in the Macro Yield hedge fund.  The annual maintenance fee is 2 percent.

Should Individual Investors Make Direct Investments In Hedge Funds?

The recent opening of the hedge fund investment universe raises an important question:  should individual investors make direct investments in hedge funds?  Just because some boutique investment firms have lowered the entrance fees for their hedge funds to a level that is well within the reach of individual investors of modest means does not in and of itself mean that individual investors with limited investment resources should jump right in and invest in these hedge fund products.

The reality is that while individual investors of modest means might feel some pride in being able to participate in the hedge fund world, they will likely do much better investing in traditional mutual funds or Exchange Traded Funds (ETFs) that charge much lower fees than hedge funds.  The difference in fees can add up to considerable differences in investment gains over long periods of time.  Also, as you can see from the above profiles, the hedge funds that are capable of accepting investments from individual investors do not always perform very well when compared to the broader stock market indexes.  A simple investment by an individual investor in a Standard and Poors 500 Index tracking mutual fund or Exchange Traded Fund (ETF) would have performed much better during 2013 than an investment in the Macro Yield hedge fund.  Not only would an index tracking fund have returned a nice 30%+ gain in 2013, but it would have do so for a fraction of the cost in fees, since index tracking funds typically charge less than one-half of one percent in annual fees, versus the two percent annual fees that most hedge funds charge.

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