How do you know if you should invest in a hedge fund? There are several questions to ask, but first of all you should check if you satisfy the minimum requirement to invest in a hedge fund. These days though, the regulations have been relaxed and many more people can invest in a hedge fund, although only a small fraction of their income or wealth. For accredited investors, thought, well, they can invest a significantly larger portion of their income or wealth in a hedge fund.
You should also check, which hedge fund you are interested in investing in. Just saying, “I want to invest in a hedge fund” is not enough. It is a very generic concept. You should know or at least have a shortlist of the hedge funds you would be interested in investing. Each one is different and just as it can be a great idea, it can be a not so good idea. There are some incredibly successful hedge fund managers, and you should try to identify them from the rest of the managers. For instance, Warren Buffett was a hedge fund manager fro 1956-1969 and George Soros was also a hedge fund manager beginning in the early 1970s. There are many, many others, these are just representative of the long-only and global macro investment styles.
So after answering the question, can you invest in a hedge fund? You have to answer should you invest in a hedge fund? Well, the answer is affirmative if you can identify a competent and honest hedge fund manager. That shouldn’t be a problem as there are close to ten thousand hedge fund managers to choose from. There ought to be some that are competent and honest. Now, are you ready to invest? You have to do the required due diligence of the fund and the manager, check their historical performance, understand how they achieve their returns, what level and type of risk they are assuming when making those returns. Risk is an unobservable aspect of investing, at least for the outsiders, so it is important that you try to gather as much information to try to get a glimpse into this dimension of the investment process. Once that is done, you can compare amongst some of the best hedge fund managers and choose the one you are more comfortable with. That is, it is not just a matter of return and risk assessment but also of compatibility of investment styles between the investment manager and yourself.
If you are an impatient type, you won’t be able to withstand a low-frequency type of investing, while if you are a long-term investor you might not like the high transaction costs of a high-frequency trading strategy, as well as the uncertainty as what tomorrow will bring.
Please make sure you cover all the bases in terms of the homework required to engage in successful investing. Once that is done, you should sit back and relax, almost forget that you have invested in a hedge fund. Then check annually for your returns. If you are outsourcing for somebody else to assume the risk, why should you constantly check the performance?