March 16, 2009

Building Wealth | Can Anyone Start a Hedge Fund?

As the economy gets worse and worse, and it appears as though much of it is tied to the banking industry, whether through bad real estate loans, poor management of funds, or out and out fraud (i.e. Bernie Madoff), I recently wondered if just anyone can start a bank, financial institution, or hedge fund.

When I googled how to start a hedge fund I got a wide variety of answers. I must admit, I know little to nothing about hedge funds, except they are notorious for making the creators of the fund and those allowed to buy into the fund tremendous amounts of money (except recently). If what I have heard is true, hedge funds are very hard to get into, take a lot of money to get started, don't necessarily have a lot of risk associated with them, and pay out handsomely. That is a combination I think anyone would go for, if you had the money.

I guess I might want to figure out what a hedge fund is before I figure out if I can start one. It appears that hedge funds are very similar to other investment vehicles, like mutual funds, investment companies, etc. Unlike mutual funds, however, hedge funds aren't registered with the government, and, like I thought, inclusion in the club is by invitation only (hedge funds are not traded publicly like stocks). Also, hedge funds can have all sorts of fun stuff in them, including: fixed income securities; currencies; exchange traded futures; over-the-counter derivatives; futures contracts; commodity options; and other non-securities investments. It appears that hedge funds are aptly named - the money put together in the fund is used as an investment tool to "hedge" against large swings in the market.

Knowing what I now know about hedge funds, I don't think I'm capable enough to participate in one, much less create one. I think I'll just have to stick with my mutual funds, individual stocks, and bonds. Although they aren't as lucrative, they don't take as much cash up front to get started, which means I can participate today.

1 comment:

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