Hedge funds are similar to mutual funds because their managers pool and invest investors’ money. The main difference is that the typical hedge fund investment strategy includes alternative investments such as derivatives, borrowing money (leverage), real estate, and side contracts (like side bets) — in addition to stocks and bonds. Hedge fund managers will tell you these alternative investments increase your returns, while at the same time, reduce your risks. Except as history shows, it doesn’t always pan out like that.
Unlike mutual funds, in order to qualify to invest in hedge funds, you must be “accredited” (per Regulation D — some fine reading here!), which basically means you’re experienced enough to make such an investment. Accredited persons must affirm they have at least $1 million in personal net worth or $200,000 in individual income or $300,000 joint income. Hedge funds normally require a minimum investment of $500,000 to $1 million. That’s a lot of cash! And fees charged by hedge funds are typically much higher than mutual fund fees.
If you’re not already a hedge fund investor, do you feel like you’re missing out? Don’t. Warren Buffett bet $1 million against any hedge fund that it could not beat the S&P 500 Index over a 10-year period. Buffett won the bet, noting afterwards, “Performance comes, performance goes. Fees never falter.” Turns out, hedge fund managers are the biggest winners. Just invest in the S&P 500, and let the rich pay the big fees.