Direct Hedge Fund Investing

What does increased direct hedge fund investing by large pension funds and managers of sovereign wealth have to do with the medium to small private investor? According to the recent Citi Prime Finance survey money managers of large pension funds and governmental holdings are taking a more hands on approach to direct hedge fund investing. The investor who asks himself what are safe investments may or may not find hedge funds on the short list of answers. A hedge fund is a private investment vehicle. It uses a range of investment strategies and investment vehicles with the goal of both growing and protecting the assets of the fund’s investors. Hedge funds received a great deal of criticism after the 2008 market crash and credit crisis. Subsequently they have been subject to significantly more regulation.

Hedge funds differ from traditional mutual funds, retirement funds, and managed investment accounts in that they seek to make profits for their clients whether the market is going up or going down. Thus hedge funds will sell short, buy options, and sell options, as well as simply buying and holding stocks. This is opposed to the basic buy and hold approach of many traditional funds. Investors pay a management fee as well as a performance fee if the fund performs well. Investors in hedge funds include pension funds, foundations, and university endowments and are commonly worth billions of dollars. A recent estimate puts hedge funds at around $2 Trillion in total assets or a little over 1 % of financial institution assets. In asking what is a good investment , many large funds have chosen hedge funds because of their significant upside potential and strong results during good years. To the degree that these funds use leveraged investments they offer the promise of strong results. To the degree that these funds use leveraged investment vehicles they put the investor at risk for substantial losses. Direct hedge fund investing by large pension funds and others would seem to be a result of these folks being stung by substantial losses during the 2008 crash. In general, the issue of direct hedge fund investing is not of concern for the small, private investor. Hedge fund participation is limited to qualified and accredited investors and the rules have tightened since 2008.

Managers of hedge funds use the same investment vehicles available to all investors. They concern themselves with the same issue such as whether it is the time to invest in Japan after the tsunami, or if direct investment in China may be profitable. A distinct advantage that hedge funds have is that by virtue of their size they can engage in significant investment research and may have specific investment opportunities not available to the ordinary investor. A problem for a hedge fund it that it may find itself needing to find a place to invest several billion dollars. To the extent that hedge funds buy or sell an equity or derivative it can upset the market. This may be where the individual investor can profit by being aware of direct hedge fund investing and just where the money is going.

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