Many investors have come to realize that alternative investments, i.e. alternative to just buying stocks and mutual fund shares, can increase your overall profit margins and lower your risk. One of the best alternative investments are hedge funds. Below, you will find 5 reasons why investors continue to profit long term using this often over looked investment strategy!
1. Help Balance Your Portfolio During Volatile Market Conditions
Hedge funds help “hedge” your bets, regardless of which way the market heads, hence the name, “hedge funds.” This becomes particularly important when the market is volatile, i.e. prices for equities like stocks and commodities are moving both up and down over a short period of time. Hedge fund managers are focused on making money regardless of which way an equity is headed. If he or she believes the price for an equity will fall, they take a “short position,” which is where they actually bet the equity will fall and they make a profit if it does. On the other hand, if they believe an equity will rise in price, they will take a “long position,” betting the stock will go up. Typically, hedge funds will contain a much higher percentage of short positions than other managed funds but they will usually contain some long positions as well.
2. Help You “Hedge” Against a Serious Bear Market
Hedge funds are one of the few types of investments that can thrive and significantly grow in a serious bear market. This is because hedge managers are highly skilled at taking short positions and profiting from equities that go down in price. On the other hand, trying to take short positions on your own is a very risky business. You’re much safer buying hedge funds managed by those who are expertly skilled at shorting equities!
3. Lack Of Regulation and Investment Constraints
A private hedge fund is not as regulated as many other investments. This gives a hedge fund manager much more flexibility, and therefore much more opportunity, to make you and your fellow hedge fund investors a lot more money!
4. Lack of Transparency
A hedge fund tends to be less transparent than mutual funds and other managed investments. While this may seem like a disadvantage at first, it is actually one of the reasons some hedge funds do so well for an extended period of time! The lack of transparency allows hedge fund managers to make specific types of investments without other managers closely watching every move they make and replicating what they do. In this way, they can develop a successful formula without having the competition copy them, and thus weaken their results over time.
5. Overall Higher Returns On Your Investment
While there are no guarantees with any type of investment, it has been shown that hedge funds outperform mutual funds on average. Likewise, most hedge funds outperform the stock market over the long-term!
Buying into a mutual fund can help your portfolio prosper and grow, even in a bear market and even when the market is extremely volatile. For these reasons, it is an alternative investment you should seriously consider.