Points To Consider Before Investing In Fund Of Hedge Funds

A fund of hedge funds is actually a spread out portfolio of hedge funds which are often not correlated. It is believed to get more persistent returns compared to mutual funds, unit trusts or individual hedge funds.

It is must for these funds of hedge funds to offer their investors a prospectus and at times require filing some specific reports quarterly with the SEC (Securities and Exchange Commission). However, it must be known that all funds of hedge funds do not get registered with SEC.

If you intend to invest in a fund of hedge funds, you must seek for some important information before you finalize your decision. It includes:

· It is mandatory that you go through fund’s prospectus or any other related materials properly. Make it clear that you do not have any doubts regarding the level of risk involved in the strategies of fund and whether they are apt for your personal investing objectives or not. Similar to any other investment the higher potential returns involve higher risks and vice versa.

· It might be possible to invest funds of hedge funds and hedge funds in extreme illiquid securities and it may be hard to value them. Thus, before investing you must know about the level to which securities of a fund can be valued by independent sources.

· Do not overlook the importance of fees. Your return on investment gets affected by them. You may require paying an asset management fee plus a performance fee. A hedge fund manager may wish to generate a larger return and thus may take greater risks due to performance fee. You need to pay these fees other than any fees that you pay to the basic hedge funds.

· Often hedge funds put restriction on opportunities offered to their customers to cash in their shares like it may be four times in a year. Also, there is a ‘lock up’ period that may be one year or more and during this period it won’t be possible for you to cash your shares.

· Do not invest on blind faith. You must be aware about with whom you are investing. It is mandatory that managers of hedge funds are qualified enough to take care of your money. Try to find out about their disciplinary history within the securities industry.

· You have right to ask questions regarding the money you are investing after all you are giving your hard earned money in someone else’s hands. You have all rights to ask questions such as where your money is going and who will be managing it and where it will be invested and the process of getting it back.

In the end, it is important that you go through every aspect of any hedge fund or fund of hedge funds; you might contemplate as an investment. However, if you come across any kind of problem with your fund of hedge funds, you can send your complain to respective Securities and Exchange Commission.