In my last post, I mentioned that I would write more on hedge funds so here you have it! Yes, hedge funds are alternative assets but how they work does not need to be a mystery or even complex to understand. Single-strategy hedge funds are hedge funds that specialize using one investment strategy, whether macro, event-driven or purely tactical. Hedge funds of funds, abbreviated “FoF” for those in the industry, are entities that invest in multiple hedge funds at once. So, a single hedge “FoF” will have exposure to multiple hedge funds of the same strategy. A multi-strategy hedge “FoF” invests in ten or twenty LPs with several fund managers specializing in distinct strategies. Each is actively managed and tactically adjusted based on performance on an ongoing basis.
As I mentioned last week, the cost of entry into a hedge fund can often be quite high, $500,000 to $1 million minimums. A person can invest in multi-strategy hedge funds without the risk of having the capital exposure of several individual single-strategy funds. It also allows them to bypass some of the minimum investment requirements many funds have as well as maintain a balanced portfolio once the new alternatives assets are introduced. Another way to avoid too much market exposure is to learn the categories of each of the hedge fund strategy, whether they are regional, by sector, or by performance target, global or aggressive.
There is no need to know about hundreds and hundreds of these funds, it’s just important to know how they work, the assumed risk, the management strategies, and the investment minimums. If you can get a grasp of these concepts, you can categorize single-, multi-, and “FoF” hedge funds easily.