Why should one consider investing in hedge funds?
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What is a hedge fund?
(Visual Description: Hedge funds often engage in leveraging and speculative investment practices that may increase the risk of investment loss, can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors. Hedge funds may involve complex tax structures and delays in distributing tax information. Hedge funds are not subject to the same regulatory requirements as mutual funds and often charge higher fees.
Leonard Lebov
Senior Analyst- Private Equity & Alternative Investments
Truist Advisory Services, Inc.)
The term “hedge fund” was first used in the 1940s to describe an investment vehicle that was designed to not only profit when the stocks the portfolio manager liked went up, but also when the stocks they didn’t like went down. Potentially, this allowed the fund’s performance to be partially protected or “hedged” when the stock market declined.
Eighty years later, the industry has expanded considerably—and there’s no all-encompassing definition.
Today, hedge funds invest in a range of global asset classes including equities, fixed-income, credit, currencies, and commodities. They use a variety of investment techniques—from old-fashioned stock picking to computer-driven methods based on large amounts of data that go by fancy names such as statistical arbitrage or systematic trend-following.
Importantly, different funds can have very different performance objectives: Some are looking to deliver outsize returns along with elevated risks, while others are much more conservative-delivering more modest returns with lower risk.
Why should one consider investing in hedge funds?
Although the asset classes may sound familiar, one of the things that make hedge funds special is their potential to make money whether the value of those assets goes up OR down.
Additionally, it’s hard to access the sophisticated investment techniques they employ and many of the instruments they use—such as swaps and other derivative contracts—through conventional ways of investing. It’s these characteristics that can make hedge funds a valuable source of diversification in portfolios. As a result, allocating to these funds over the long term may help achieve investment goals more effectively than by using traditional assets alone.
Hedge fund investors also have the unique opportunity to have their money managed alongside that of some of the world’s most successful portfolio managers.
Those managers choose the hedge fund format because of the flexibility it affords them when managing their own wealth.
Balanced against these advantages are the relatively high minimum investments required and the need to wait—perhaps for a few months or significantly longer—if you want to convert a hedge fund investment to cash.
What are the keys to successfully investing in hedge funds?
Navigating the hedge fund landscape can be challenging. The historic gap between the best- and worst-performing managers is much wider than in other asset classes, so manager selection is critical.
(Visual Description: Investment managers’ performance dispersion
The difference between the best and the worst hedge fund performers is far greater than in other asset classes. This dispersion makes research even more critical.
Annualized Return chart displays a range of 16% down to -4%
Global Equities ranging between 7.3% and 8.7%
Global Bonds ranging from -1.8% and -0.1%
Hedge Funds with. Bottom quartile managers of 0.4% and
Top quartile managers of 14.7%
Data Source: Morning Star, Pivotal Path, JPMorgan Asset Management: Time period 2013-2022)
Important factors that may increase long-term success include:
1. A trusted and extensive network to identify potential “best-in-class” managers
2.The expertise to perform deep due diligence—both investment due diligence and assessing the business and operations of the manager, and
3.The capacity to continually monitor an investment once it’s made.
Most importantly, your unique investment goals and circumstances should be a primary drivers of which hedge funds are right for you.
(Visual Description: Factors that may determine the right hedge fund for you)
Are you looking to be more aggressive and enhance your long-term returns, or are you more defensive and looking to potentially protect your portfolio during volatile periods?
When will you need access to your money—and how much do you have to invest?
Truist’s dedicated and experienced team of hedge fund professionals is available to work closely with properly qualified investors and their advisors to help answer these questions and develop a hedge fund investment plan.
The hedge fund industry has grown significantly over the years.
Today, it offers accredited investors an opportunity to potentially enhance their existing portfolios in a myriad of potential ways: by boosting returns over the medium-to-long term, minimizing downside risk, or providing valuable diversification.
Since every client’s journey is unique, we encourage you to contact your Truist advisor to learn more and to determine whether hedge funds are right for you.
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Disclaimer:
This video is provided as a service of Truist Investment Services, Inc. and Truist Advisory Services, Inc.
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Hedge funds often engage in leveraging and speculative investment practices that may increase the risk of investment loss, can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors. Hedge funds may involve complex tax structures and delays in distributing tax information. Hedge funds are not subject to the same regulatory requirements as mutual funds and often charge higher fees.
Leonard Lebov is a registered investment advisor with Truist Advisory Services, Inc.
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Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.
The risk profile of private equity investment is higher than that of other asset classes and is not suitable for all investors. There is inherent risk in investing in private equity companies, which encompass financial institutions or vehicles whose principal business is to invest in and lend capital to private held companies.
These risks include a long term investment horizon, rigid liquidity restraints, and high bankruptcy rates among portfolio companies. Generally, little public information exists for private and thinly traded companies and there is a risk that investors may not be able to make a fully informed investment decision.
Listed Private Equity Companies are subject to various risks depending on their underlying investments, which could include, but are not limited to, additional liquidity risk industry risk, non-U.S. security risk, currency risk, credit risk, managed portfolio risk and derivatives risk (derivatives risk is the risk that the value of the listed Private Equity Companies derivative investments will fall because of pricing difficulties or lack or correlation with the underlying investment) There are inherent in investing in private equity companies, which encompass financial institutions or vehicles whose principal business is to invest in and lend capital to privately held companies. Generally, little public information exists for private and thinly traded companies and there is a risk that investors may not be able to make a fully informed Investment decision. Listed Private Equity Companies may have relatively concentrated investment portfolios, consisting of a relatively small number of holdings.
A consequence of this limited number of investments is that the aggregate returns realized may be adversely impacted by the poor performance of a small number of investments, or even a single investment, particularly if a company experiences the need to write down the value of an investment.