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7 Tips for Successful Hedge Fund Investing

Hedge Fund InvestingI just read an article a couple days ago that sounded like a similar one of mine you might have read called "How to Invest in Hedge Funds." This article was by Scott Frush and it covers the seven strategies for successful hedge fund investing. Here is his 7 tips for investing in hedge funds. None of the tips below are financial advice from myself or from the author of the article that I am summarizing below.

1. Do Your Homework

Since hedge funds are not regulated by the SEC or government, it's up to you to research and evaluate a hedge fund before investing in it.

2. Invest In Proven Managers

Although investing in a manager with an impressive past performance will not guarantee the same results, it is a good rule of thumb to follow. Generally, look for hedge fund managers with a record of generating consistently good returns.

3. Find An Investor-Friendly Hedge Fund

Search for flexible, investor-friendly hedge funds that offer investors agreeable provisions--like for example: high-water marks or a reasonable fee structures. This is secondary to a hedge fund's performance record but it is still an important consideration when deciding which hedge fund to invest in.

4. Consider Hedge Funds In the Context of Your Entire Portfolio

Understand your hedge fund investment within your overall portfolio. This means understanding the effect that your investment has on the rest of your portfolio, so as not to unbalance your portfolio with the addition.

5. Diversify

A good way to diversify is to invest in funds of hedge funds, which offer an immediate investment in a variety of hedge funds. However, if you don't diversify with funds of funds it is wise then to invest in multiple managers or even some different strategies to improve your overall portfolio.

6. "You Gotta Know When To Fold Em'..."

Even if you follow all these strategies and thoroughly research your hedge fund investment there is a chance that it just won't work out. If this is the case, whatever the reason, you have to know when and how to walk away. Some hedge funds have obstacles to withdrawing your investment that you should be aware of. If the investment does not appear to be working out, quickly withdraw.

7. Be A Smart Rational Hedge Fund Investor

The key to investing in hedge funds--or just investing in general--is to be informed and act rationally when managing your portfolio. To become a smart and logical investor you need to learn the important lessons of hedge funds and have a firm grasp of the investing basics. Acting rationally means avoiding common behavioral blunders that often plague investors like denial, overconfidence or following the herd instinct. The key to hedge fund investment is to act intelligently and rationally.

I summarized the article above because it was interesting and practical. None of the above should be regarded as financial advice or solicitation to invest or purchase anything related to hedge funds.

- Richard

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