ARE HEDGE FUNDS SUITABLE FOR RETAIL INVESTORS?
Hedge funds, real ones, not the mutual funds that use the same strategies as hedge funds, are not suitable for retail or small investors. The character and nature of hedge funds do not harmonize with the minimal capability of retail investors.
Retail Investors Have Limited Capital to Invest
Retail investors are small investors with a very small capital to invest. They only buy securities in smaller quantities or retail, thus called, retail investors. Retail investors purchase and manage their investment personally or through investments clubs and brokers. Retail investors invest less frequently compared to institutional investors although they sometimes earn by buying and selling at a daily rate through online trading mechanisms. (Investopedia, n.d.; Investing Answers, n.d.; Tatum, n.d.)
Hedge Funds Require a Huge Amount of Capital as Initial Investment
Hedge Funds are “private investment partnerships” that are exclusive to a small number of wealthy and sophisticated investors who are required a large initial investment. In the US, hedge funds require 0,000 or ,000,000 initial investments or more (Spaulding, 2011), an amount that small or retail investors cannot afford. These investments are kept within the fund for a certain period of time, like for instance one or two years. Managed by one investment manager, advanced, flexible and sophisticated investment strategies such as leveraging, short selling and derivatives are utilized to generate high returns on investments. (Investopedia, n.d.; Kovas, n.d.) For a hedge fund to be successful, at least million is needed plus stringent risk management mechanism and disciplined investing. This can earn 8% in the first year if all goes well. (All About Hedge Funds, 2006)
Investing in Hedge Fund is Profitable but Very Risky
Hedge funds are profitable, in fact more profitable than mutual funds and even hedge mutual funds that mimic the character of hedge funds. Between 1994 to 2004 assets from hedge funds have grown five times, some estimate these assets to 0billion (Kovas, n.d.). Hedge funds can not advertise itself and their information is highly protected from the public. Hedge funds are risky, the Financial Services Authority (FSA) in the UK and the Securities Exchange Commission (SEC) in the US and other regulatory bodies in Asia and Europe, only permit high net worth or very wealthy investors, such as institutional investors, pension funds, endowments and family offices, to invest in hedge funds. Hedge funds are managed only by one single manager that is why it is sometimes called as single manager funds. When the manager fails, the rest of the investors carry the burden of the loss. Smaller or retail investors are restricted from investing in hedge fund to protect them from the very high risk of losing a lot of money (All About Hedge Funds, 2006). Very recently hedge funds are opening up to retail investors. But retail investors in hedge funds are still unprotected by regulatory bodies and invest at their own risk. Fund of hedge funds is now a retail vehicle for retail investors to invest in hedge funds. Funds of hedge funds in the US require retail investors an initial investment of ,000 to 0,000.00, which is a considerably low investment compared to real hedge fund investors. Thus, retail investors can invest in hedge funds in limited circumstances. As to what to call retail investing in hedge funds is yet to be debated and whether to protect retail investors investing in hedge funds or to just let them sign a waiver to invest at their own risk is an issue open for discussion. Retail investors are presumed to have a lower level of sophistication in securities investing, with their very little capital, and very little asset, the risk is very much high for them. In Hong Kong and Australia retail investors are already permitted to invest in hedge funds but their fund regime is different from the UK or the US as they rely on disclosure rather than regulations. (Kovas,n.d.)
Hedge Funds Do Not Have the Infrastructure and Experience to Service a Large Number of Retail Investors
Retail Investors can either gain from or lose from hedge funds. Hedge funds relatively stable and significant over-all return, can improve the investment portfolio of retail investors. Knowledge of hedge fund trading and investment strategies also benefits the retail investor himself. Hedge funds as discussed earlier, is very risky because they are unregulated and there is a great possibility of misconduct and fraud. If this is the case, only the wealthy and the real hedge fund investors can bear the impact of the loss, which the poorer retail investor cannot. Aside from the monetary risk in hedge fund investment, real hedge funds cannot service a relatively large number of retail investors because they lack the experience and infrastructure to do so. Thus reform in the regulatory mechanism is needed to protect retail investors. (Lacey, 2003)
REFERENCES
All About Hedge Funds, 2006. Hedge Fund Facts. [online] Available at:< http://www.fundshedge.co.uk/hedgefundsfacts.htm> [Accessed 17 May 2011].
Investing Answers, n.d. Retail Investor. [online] Available at:< http://www.investinganswers.com/term/retail-investor-911> [Accessed 17 May 2011].
Investopedia, n.d. Retail Investor. [online] Available at:< http://www.investopedia.com/terms/r/retailinvestor.asp> [Accessed 17 May 2011].
Investopedia, n.d. Hedge Fund. [online] Available at:< http://www.investopedia.com/terms/h/hedgefund.asp> [Accessed 17 May 2011].
Kovas, A., n.d. Should Hedge Fund Products Be Marketed To Retail Investors? A Balancing Act For Regulators.pdf. [online] Available at:< http://www.ilf-frankfurt.de/uploads/media/ILF_WP_010_01.pdf> [Accessed 17 May 2011].
Lacey, D., 2003. Democratizing The Hedge Fund: Considering The Advent Of Retail Hedge Funds. Pdf. [online] Available at: <http://www.law.harvard.edu/programs/about/pifs/llm/sp32.pdf> [Accessed 17 May 2011].
Spaulding, n.d. Hedge Funds and Funds of Hedge Funds. [online] Available at:< http://thismatter.com/money/funds/hedge-funds/hedge-funds.htm> [Accessed 17 May 2011].
Tatum, M., n.d. What is a Retail Investor? [online] Available at:< http://www.wisegeek.com/what-is-a-retail-investor.htm> [Accessed 17 May 2011].
Credit:ivythesis.typepad.com
0 comments:
Post a Comment