Increasingly sought after by high net worth investors, alternative financial products are an excellent way to diversify your portfolio and thus mitigate the risks typically associated with traditional investments.
Alternative products include hedge funds, which, depending on their strategy, can offer many benefits, while securing the future of your financial wealth. For many, they remain complex products whose benefits are not sufficiently known. This calls for a little demystification.
We debunk 5 myths about Hedge Funds in the following paragraphs:
Myth #1: Very High Risk
Risk is often discussed when the volatility of the financial product is such that it may lead to losses, sometimes significant.
But did you know that hedge funds can be significantly less risky than many publicly traded stocks and bonds?
It all depends on the strategy used to manage these funds. In fact, conservative strategies such as arbitrage try to obtain absolute returns by realizing profits with a minimum of risk.
Myth #2: Fees Are Too Expensive
Many managers of equity, bonds and other traditional or alternative financial products charge a very high and varied fee.
Like managers of equity and bonds, many hedge funds will aim for maximum performance, and therefore require higher fees as compensation than other financial products.
On the other hand, some hedge funds that aim for stable return and long-term capital protection will require lower fees that are aligned with this more conservative strategy.
Finally, it is also important to note that a large majority of hedge funds have a fund performance component in their fee structure in order to align the interests of managers with those of investors.
Myth #3: Fraudulent
You've heard about fraudulent hedge funds, dishonest managers or spectacular scandals in the hedge fund world. But it is important to remember that these unfortunate situations are also found elsewhere in other areas of financial management involving derivatives or traditional products.
Fortunately, well-managed hedge funds are closely monitored by competent financial authorities and undergo extensive due diligence. Because of this, they remain very popular funds for high net worth investors.
Ensuring the fund is not fraudulent is just a matter of finding a fund that has certain characteristics. These include a fund that has proven stability for many years, consistent performance, established reputation with very large institutions, and a conservative strategy. Investing in a fund that has these characteristics will make sure you are safely diversifying your holdings.
Myth #4: Lack of Transparency
As alternative product in the exempt market, hedge funds are not required to provide you with prospectuses detailing key information about their product.
Although some funds in the exempt market are sometimes criticized for their lack of transparency, others rely on the transparency of their strategic choices, as well as transparency in management, to maintain the confidence of their clients and investors in the long term.
These funds, which value transparency, will always have this advantage. Funds who value transparency will always establish a trustworthy relationship with their investors from the beginning.
Myth #5: Too Short-term
Although a large portion of hedge funds aim to quickly achieve high returns in the very short term, other funds will instead target a less aggressive, more conservative, and long-term goal. These funds focus on yielding more modest but more constant returns over the long term.
Funds with a longer-term focus more on preserving capital while investing to generate a stable return over the long-term.
If you are an accredited investor, including hedge funds that are based internationally in the geographic diversification of your portfolio will help you mitigate risk and preserve assets over the long term.
Did you know that North American High Net Worth Investors have more than 10% of their holdings in alternative financial products?