How does a hedge fund operate and what is the market like in Canada? A hedge fund is something that pools investors' money and invest it with the aim to make a profit. Many of the funds invest in a variety of markets. In contrast to mutual funds, the managers of hedge funds play an active role in managing investment portfolios. The goal is high returns, irrespective of the index or overall market movements. Hedge fund managers are allowed more freedom when developing trading strategies, unlike mutual fund managers. Higher returns and portfolio diversification are the key reasons for investing in a hedge fund. On the downside, hedge funds can be very speculative. They are known to make risky investments, resulting in major gains or losses.
Before you decide to invest in a hedge fund, you should get as much information and marketing materials about it as possible. You need to be aware of the risk involved. Find about the investment strategies of the fund and whether they correspond with your risk tolerance and goals.
The right of investors to redeem their shares might be more limited even in Canada. Many such funds will restrict your opportunities to cash in your shares. This can be done during certain times of the year, and up to four times in total. What is more, a portion of your funds will not be available for a specific time period, such as one year or more.
What fees are charged on your funds? Usually hedge funds charge an asset management fee of 1 to 2 percent of your assets as well as a certain amount on the profit, if such is generated. If there is no profit, the fund does not take responsibility to cover your loss. Some funds charge very high fees on "performance" options, and this may stimulate staff to take excessive risks.
What about liquidity issues? The fund may invest your money in illiquid securities, and these are not easy to value. You should take the time to figure out how the assets are valued and make sure you understand the rules for liquidating your investment.
In Canada, hedge funds are traded on retail and exempt markets. The level of regulation is significant with the retail market. These ban some types of investment strategies. For this reason, most of the hedge funds in Canada are traded on the exempt market, where there is no limit on the type of investment strategies used. Trading on this market is associated with wealthy individual investors and large-scale institutional investors.
There are many different types of hedge funds you can choose from. They vary with the respective market (equity, bond, forex, goods, stock) and the strategy (micro, macro, global). They also vary depending on the financial instruments used (derivatives, long/ short positions, etc.), the degree of risk, and more.
Before you decide to invest in a hedge fund, you should get as much information and marketing materials about it as possible. You need to be aware of the risk involved. Find about the investment strategies of the fund and whether they correspond with your risk tolerance and goals.
The right of investors to redeem their shares might be more limited even in Canada. Many such funds will restrict your opportunities to cash in your shares. This can be done during certain times of the year, and up to four times in total. What is more, a portion of your funds will not be available for a specific time period, such as one year or more.
What fees are charged on your funds? Usually hedge funds charge an asset management fee of 1 to 2 percent of your assets as well as a certain amount on the profit, if such is generated. If there is no profit, the fund does not take responsibility to cover your loss. Some funds charge very high fees on "performance" options, and this may stimulate staff to take excessive risks.
What about liquidity issues? The fund may invest your money in illiquid securities, and these are not easy to value. You should take the time to figure out how the assets are valued and make sure you understand the rules for liquidating your investment.
In Canada, hedge funds are traded on retail and exempt markets. The level of regulation is significant with the retail market. These ban some types of investment strategies. For this reason, most of the hedge funds in Canada are traded on the exempt market, where there is no limit on the type of investment strategies used. Trading on this market is associated with wealthy individual investors and large-scale institutional investors.
There are many different types of hedge funds you can choose from. They vary with the respective market (equity, bond, forex, goods, stock) and the strategy (micro, macro, global). They also vary depending on the financial instruments used (derivatives, long/ short positions, etc.), the degree of risk, and more.
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