Why Do The Rich Invest In Hedge Funds?
They’re the mysterious people who for one reason or another, acclimated the image of the hooded cloak and dagger investors. They can be seen as both the smartest of the bunch when it comes to stocks and trading, but other times when things go wrong, they’re seen as the ugly face of greed. However, those who are rich enough to invest their wealth into hedge funds are just like any other person looking to make some money in the market. Hollywood may portray them as the cool and naughty kids on the playground at times, but they’re actually a balancing force that is needed in the world’s economies. Hedge funds work a lot like mutual funds except the principles are the opposite in terms of entry and operating techniques. The basic premise is the same however as hedge funds want to accumulate wealthy clients and pool their resources to use as leverage. But why do the rich prefer to go this route than go a more public route?
Privacy is golden
If you’re a well-known figure in the public eye, your finances are going to be treated as fair game. How would you feel if anyone around the world could simply put your name into a search engine and see how much your net worth? Most likely you would feel violated and feel as if your privacy was under attack. So this feeling is carried into the market as rich clients would prefer their financial dealings to be kept secret. Mutual funds are advertised in all kinds of magazines, newspaper, online mediums, etc. This is because if those in the mutual fund put it to a vote and agree that they should go public with a portion of their fund in order to make more money, it can be done. A hedge fund does not show up in any advertisements at all. This is because they not fully regulated by the SEC. Because hedge funds have their own operating techniques and because they’re small in comparison to the rest of the market, they are left alone to do their own thing.
Aggressive risk chasing
Once upon a time hedge funds were attractive because they protected investors from global downturns, this meant the hedge funds took responsibility for any unforeseen ( but which they should have seen) losses by setting aside lumps of revenue to pay back their clients. They were also supposed to hedge the investor’s risk meaning they would give them a qualified summary and or advice of how much by they can be exposed. Those days are gone, and now hedge funds aggressively chase risk for the maximum return possible. To do this, they have lots of tools at their disposal. The fact that risk has now become a mathematical equation thanks to algorithmic trading services is a big boost to the confidence of hedge funds. With this algorithmic software, they can backtest a model to see how things would pan out if they invested in a particular derivative. The sophisticated charts also produce a clear picture for performance evaluation and other metric studying. The hedge fund manager is encouraged to take on more calculated risks because he or she can claim performance fees for overachieving. The bonus fees are taken straight out of the profit pot so you can imagine the incentive.
Availability and exclusivity
The SEC does not regulate hedge funds to protect investors for the reasons aforementioned, but one other reason is because hedge funds do not deal with the public. The general public is turned away from investing in hedge funds. Different hedge funds have their own thresholds which they set to attract a certain type of investor. They may want investors with incredibly large amounts of wealth because they want to invest huge sums of money each time. On the other hand, it may just be the level of experience their clients have. Things can be shaky in the world of hedge fund management because the risks can be quite stout. Hedge funds don’t want their clients to run off at the first sign of market turmoil, so they rely upon only taking on those with the experience.
If we’re all honest, we would jump at the chance of being in an exclusive financial club. The old adage of ‘use the money to make money’ is turned up to eleven in hedge funds. The risks are high, so some of the best brains work in these kinds of firms. You stand to make huge amounts of profits which perhaps you could not do anywhere else. It’s easy to see why rich investors choose private hedge funds instead of going the many other different public routes.