What is a hedge fund?
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. 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 comprising traditional investments such as stocks and bonds.
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. As a result, allocating to these funds over the long term has helped many achieve their investment goals more effectively than by using traditional assets alone.
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 gap between the best- and worst-performing managers is much wider than in other asset classes, so manager selection is critical.
Absolute requirements for long-term success include:
- A trusted and extensive network to identify “best-in-class” managers
- The expertise to perform deep due diligence—both investment due diligence and assessing the business and operations of the manager, and
- The capacity to continually monitor an investment once it’s made
Most importantly, your unique investment goals and circumstances should dictate which hedge funds are right 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.
Explore further
The hedge fund industry has grown significantly over the years. Today, it offers investors an opportunity to 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.