Hedge funds are alternative investment schemes for wealthy and institutional investors. They include individuals with a high net worth, trustees of endowment funds, banks, and insurance companies. The portfolio of these high-profile investors consists of a diverse range of securities. They trade in derivatives, real estate, currencies, and assets, which is easily convertible to cash. In doing so, investors have two clear objectives. They want to maximize their potential returns while trying to eliminate any kind of risk. Almost all of them also intend to immune themselves from the volatility of the financial markets.
Scott Tominaga – What type of investors can participate in hedge funds?
Scott Tominaga is an American financial expert with over 17 years of experience under his belt. His expertise is in assisting his investors with their hedge fund schemes. He has been holding the post of Chief Operating Officer in PartnersAdmin LLC since its inception in 2008. The popular company provides dynamic high-value back-office solutions to businesses in the finance sector. This enables them to significantly minimize their systematic risks, maximize profits, and ensure investor protection.
He explains managers generally exclude the involvement of ordinary investors in the hedge fund schemes. They prefer to allow those who fall under the ‘accredited category’ to participate. The investors should have a net worth of one million dollars or assets whose equity value exceeds $5 million. Moreover, they should be earning an annual income of over $ 200,000 for at least two years consecutively. The investors need to be aware of 4 common strategies fund managers should adopt to maximize their returns:
- Distressed debt
This strategy involves the fund managers investing in corporate bonds of companies facing a liquidity crisis. The businesses have no option but to devalue their debt in the market. Otherwise, they may become bankrupt and have to liquidate their assets.
In this strategy, the fund managers exploit the price difference of closely-related investment. They adopt a policy by simultaneously buying and selling them in the market to earn maximum returns. Only then can they ensure their investors’ risks are comparatively low.
These strategies are similar to arbitrage, where fund managers exploit the price fluctuations in a company’s securities. This is normally in response to major corporate events. These could be mergers, acquisitions, takeovers, or internal restructuring.
- Hedge Equity
Under this strategy, the fund managers take advantage of fluctuations in stock prices in the market. They opt to purchase stocks whose intrinsic value is likely to fall within a short time. They then proceed to sell the stocks whose prices they assume will rise during the same interval.
Scott Tominaga concludes by saying hedge fund investment can be beneficial to a certain category of investors. They should have a net worth, which exceeds one million dollars and an annual income of $ 200,000. Many of them should even own assets whose equity value is equivalent to $ 5 million. However, they should be aware of what common strategies their fund manager uses to maximizes their returns. These could include distressed debt, hedge equity, event-driven, and arbitrage. Only then can they decide whether it is worthwhile investing in a hedge fund or not!