Choosing a type of fund in which to invest is an important decision. You need to ensure that it matches with your investment goals, risk appetite, liquidity needs and gives you the type of return you are after. Countless times, investors shy away from investments that would otherwise fit their needs to a T because they have certain misconceptions about them. Hedge funds, in particular, are not well understood by many people who could otherwise benefit from them. For this reason, today we explore 5 common misconceptions about hedge funds:
Misconception 1: Hedge funds are more risky than traditional investments
In truth, the term “hedging” from which these funds draw their name means using financial instruments strategically to offset the risk of unfavorable market movements. In other words, the core strategy of most hedge funds is to take defensive positions so that it is making money regardless of whether the market is bullish or bearish.
In comparison, most other traditional asset classes carry higher amounts of risk.
Misconception 2: Hedge funds use complex investment strategies
Hedge fund managers use the same investment strategies as any other investor. The only difference is that they can access a broader range of options to optimise these strategies, which include leveraging, short selling and derivatives.
Misconception 3: Hedge funds are secretive and thus unsafe
Many fund managers are reluctant to discuss the specifics of their investment strategy, and this may cause potential investors to be skeptical. However, this information is proprietary because it is what gives them their competitive edge. If it was revealed, it would be easily replicated by competitors, who would profit from a strategy whose development they had not invested in.
A better indicator for a company’s trustworthiness is checking whether or not it has been regulated by the Capital Markets Authority (CMA). CMA ensures that the fund manager is compliant with all trading regulations and does not endanger investors’ money.
Misconception 4: Traditional investments offer better returns
In reality, hedge funds outperform most other traditional investment classes, not only giving the investor a higher return but also minimizing risk. Their ability to take whichever position is most suitable to capitalise on the market movements also means that hedge funds offer better downside protection and always have the opportunity to earn.
Misconception 5: Hedge funds are illiquid and inaccessible
While liquidity and access may vary slightly across fund managers, it should take no more than a few days to liquidate your investment and exit from a hedge fund. Thus, any investor who needs easy access to their capital should consider them as a top option.
In conclusion, hedge funds are actually a risk-managed, high-yielding investment vehicle that can help investors achieve their financial goals. To learn more about how they earn a return visit here or email clientservices@sib.co.ke to learn more about our investment products.