Private Funds, more commonly known as “hedge” funds belong to the “alternative investments” asset class. While these funds are called hedge funds, the trading objectives vary greatly from fund to fund and many may not even contain a “hedging” strategy. Private funds are typically structured as Limited Partnerships and each investor becomes a Limited Partner of the entity. Their ownership is based upon the amount of money they invest as a percentage of the total money invested in the Limited Partnership.
Why should I consider Private Fund?
Private Funds allow for a variety of trading styles that are not available to individually managed brokerage accounts. Many brokers and advisors cannot execute certain trades in individual accounts because the trade is deemed inappropriate or too risky. This prevents a variety of trades that would otherwise capitalize on market conditions. As an example, if the market were showing signs of exhaustion at a certain level, and a downturn is expected, you would want a “short” position on a broad market index. Many individual accounts are prevented from holding short positions. Other accounts are prohibited from certain options strategies. In a private fund, all the investment capital is pooled together and the fund itself is approved to trade all of these strategies and many more. So, you would be able to have your capital participate in these aggressive strategies.
Private Funds and Their Place in Your Portfolio
- Private funds are part of the Alternative Investments classification
- Alternative Investments are used to balance a portfolio and add additional opportunities such as real estate, metals, and other non-traditional investment products
- Typically alternative investments should be limited to a maximum of 10-12% of total investment capital
- Accredited investors should fully understand the objectives of the private fund along with the types of investments the fund will hold and trade
- Prospective Investors should conduct a thorough due diligence review of the management of the fund, traders, accounting methods and fee structure
- With the proper research and allocation, private funds can be very powerful as part of an overall long term investment plan