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Why are accredited people the only ones who can access hedge funds?

Defining hedge funds 

A hedge fund is an investment that does not fall under the regular kinds of investments. Hence, it is an alternative investment. It uses various strategies to generate active returns, also known as alpha, for the people who invested in it. Just like any other investment or trade, the goal is to generate profits. But in hedge funds, the goal is higher — it should exceed a specific benchmark. And since the goal is to create high returns, hedge funds tend to use aggressive management or derivatives and leverages. These derivatives and leverages may either be in domestic or international markets.


The Security and exchange commission has lesser regulations when it comes to hedge funds compared to other types of funds because not anyone and everyone can access them. Hence, only accredited investors can. So, it may be safe to say when hedge funds come into the picture, we can expect fewer regulations.

Tell me more about hedge funds. 

One hedge fund may use a different strategy from another. They are classified depending on the investment style. Thus, every hedge fund has a different take on finding an edge on every market opportunity. Also, the risk that comes with every style will be at a different level.

In a sense, hedge funds are very exclusive. Only a few accredited investors have access to these private investments limited partnership. The initial minimum investment should be high. Let us also not forget the fact that they are not liquid. These hedge funds need their investors to agree on a lock-up period. Investors should keep their money in the fund for a minimum of one year. Although a withdraw is not impossible, it can only be done twice a year or every quarter. 


How can you tell hedge funds apart from other investments?

Hedge funds possess specific characteristics that can make you sure that these are hedge funds. Here is a list:

  • Exclusivity. As we have mentioned earlier, only accredited and qualified investors have access. A qualified investor has at least $200,000 annual income for the last two years or a net worth beyond $1 million, excluding the house where he lives. SEC has a say whether a person can handle such risk or not.
  • Broader investment latitude. Hedge funds can invest in anything, unlike mutual funds that can only stick to bonds and stocks and are most likely long-only.  
  • Allow leverage. Most of the time, hedge funds allow borrowed money to make more returns depending on the strategy used. 
  • 2 and 20 fee structure. Hedge funds charge both expense and performance fees, also known as “two and twenty.” It will take 20% of the hedge fund’s total gain and a 2% asset management fee.

Ending today’s lesson

Hedge funds are very flexible, and any strategy is acceptable as long as it is disclosed to the investor. People, especially the wealthy ones, prefer investments such as hedge funds because of this and the fact that they are involved in the most exceptional financial blow-ups. Hedge funds were also the reason why some outstanding money managers can generate long-term returns. Also, hedging’s goal is to create more returns while reducing risks.