How Anyone Can Invest in Hedge Funds

Investing in hedge funds was once limited to only wealthy individuals and institutions. Minimum investment amounts were — and still often are — a significant barrier to entry. But thanks to the rise of alternative investment platforms, now anyone can invest in hedge funds.

This article takes a closer look at hedge funds, how they work and how to invest in hedge funds. 

What is a Hedge Fund?

A hedge fund is a pooled investment fund that uses active strategies to generate returns for its investors, such as long/short, absolute return or global macro strategies. Professional fund managers employ sophisticated risk-management and portfolio construction methods to increase returns. 

Although hedge funds can offer high returns, they also may come with a higher degree of risk than traditional investment vehicles. Hedge funds often use a high degree of leverage and invest in a wide range of assets, including stocks, bonds, currencies, commodities and derivatives.  

Only accredited investors who have a minimum level of wealth or income can usually access hedge funds. 

Who Can Invest in Hedge Funds?

Because of the high-risk, high-reward profile, hedge funds are only available to accredited investors. Accredited investors must have a minimum net worth of at least $1 million (excluding the value of their primary home) or individual annual incomes exceeding $200,000 for the last two years. They must also expect that level of income to continue. 

As a result, traditionally only high-net-worth individuals or institutions, such as pension funds and endowments, were able to invest in hedge funds. In addition to the type of investors, traditional hedge funds may also limit the number of investors they have. 

But the rise of alternative investment platforms has democratized opening a hedge fund account, curbing the limits to entry. Platforms now offer hedge fund investment options with relatively low minimum investment requirements, giving retail investors access to this formerly exclusive asset class. 

Are There Hedge Funds Open to Anyone?

Some alternative investment platforms offer hedge fund exposure to anyone, though they are relatively rare. To invest in these hedge funds, you can meet relatively lower minimum investment requirements, and you may not be subject to lock-in periods, which improves access and liquidity. 

Why the Average Investor Should Invest in Hedge Funds

Investing in hedge funds provides access to a potentially lucrative market of alternative assets. An average investor can now invest in hedge funds and benefit from:

• Portfolio diversification: Hedge funds can invest in a range of assets, including stocks, bonds, currencies, commodities and derivatives or wine, which can diversify an investor's portfolio and potentially reduce overall risk.

• Potential for a higher return on investment (ROI): Access to hedge funds usually increases your portfolio exposure to different investment strategies that may generate higher performance. 

• Fully professionally managed portfolio: Hedge funds are typically managed by experienced professionals with investing expertise who follow the markets full time. A skilled hedge fund manager has invested throughout market cycles and performs extensive analysis of investment opportunities.

• Flexibility: The term hedge fund comes from the feature that hedge funds can typically sell short assets to hedge against downturns. Hedging enables funds to adapt to changing market conditions and perform under different market conditions.

How Anyone Can Start Investing in Hedge Funds 

Hedge fund investing has become more accessible, but it’s important to carefully consider your choices. Here are some common steps to start investing:

Research the Hedge Fund

As of 2022, the U.S. had over 3,800 hedge funds. Researching and comparing different funds is crucial to finding one that aligns with your investment goals and risk tolerance. You may need to review the hedge fund strategy, track record, management profile and fees, for example. Most of this information can be found in the fund prospectus.

Meet the Minimum Requirements

The minimum investment for hedge funds varies depending on the fund and the platform. Some hedge funds have relatively high minimum investment requirements, while others may have lower minimums or even allow investors to start with as little as a few thousand dollars. 

Make sure you research the minimum investment requirements for your chosen hedge funds. As with any investment, you are taking on risk and should feel comfortable with the amount you are investing. 

Be Prepared for Lock Periods

Not all investments let you withdraw money whenever you want. Hedge funds are often less liquid, and you’ll need to take note of investment lock-up periods. A lock-up period is a set amount of time investors commit to staying invested. Investors who need liquidity over a shorter period of time may want to reconsider their investment because of the lock-up restriction.

Lock-up periods may be longer for hedge funds than for other investments, where you can only redeem investments four times a year or less. Carefully research the lock-up period for any hedge fund you are considering to make sure you are comfortable with the terms. 

Get to Know Your Hedge Fund Manager

When you invest in a hedge fund, you’re trusting the fund manager and team to make investment decisions with your money. Before investing, research the fund manager, the team and past performance. Establish a few metrics you can use to judge the hedge fund manager, including the track record and team qualifications. 

You can also search for news about the manager and talk to other investors about their experiences with the fund. The manager’s Form ADV will show whether the hedge fund manager has any disciplinary history in the securities industry.

Monitor the investment

After investing in a hedge fund, try to regularly monitor the performance to stay updated about any changes to the fund or other factors that could affect the investment. You may have to review the fund's monthly or quarterly reports or communicate with the fund manager.

Hedge Funds Made Easy

Hedge funds are a type of investment that has traditionally been available only to wealthy individuals and institutions. But the rise of alternative investment platforms means anyone can invest in hedge funds without excessive minimums.

Hedge funds offer the potential for high returns and diversification as well as access to professional management and a wide range of alternative investments. Investing in hedge funds may expose you to risks, such as lock-up periods and potential losses, but risk-adjusted returns are often attractive.

Whether you're a seasoned investor looking for new opportunities or a beginner just starting out, investing in hedge funds can be a highly profitable addition to your investment portfolio.

Frequently Asked Questions