The Disadvantages of Investing in Hedge Funds

Published On July 4, 2018 | By James Stokes | Business

Hedge funds offer a lot of advantages. In addition to that, they can also give you a lot of options when it comes to the investment strategy that you want to use. Of course, each strategy has its own unique benefits and risks, and you have to know those disadvantages.

As we have said before, risks are very much inherent in any kind of investment. That’s also true for hedge funds. In spite of the huge advantages that you can get from them, you are still face with some uncertainties and risks that you will have to manage  Forex Trading Strategies  if you want to stay in the game.

Here are the disadvantages you need to withstand if you’re planning to use Finance Brokerage Education hedge funds.

Large investment fees

Perhaps one of the most talked-about disadvantages of hedge funds is the costs and expenses you have to pay.

Hedge fund managers normally charge for both a performance fee on top of the management fee, which is usually 2 percent of the net value of the fund. You have to pay such a fee every month.

 And with performance fees, you can expect them to range around 20 percent of whatever the fund earned in any given year. Performance fees are usually used to push investors to make their profits as big as possible.

Standard Deviation

The second disadvantage of hedge funds is the use of a statistical tool called the standard deviation. This is a very widely used tool that gauges the risk in investing in a particular hedge fund.

The standard deviation measures the volatility of possible gains and is expressed as a certain percentage per year.

The statistic can give a good measure of potential variation in gains during the year. On the flip side, the downside is that the standard deviation cannot tell you the complete picture of the risk of return.

Downside Capture

The downside capture refers to the risk management measure that is used to see the level of correlation a hedge fund has with a specific market when that market is currently sliding. The lower the downside capture measure of a fund, the better equipped the hedge fund will be in order to handle the market slide.

However, the disadvantage is that all funds are compared to a unified benchmark for the market. If a hedge fund manager uses a different kind of investing style from the benchmark, the downside capture ratio may perhaps show that the fund is underperforming the benchmark, even if the maket in fact is generating high returns.

Draw down

A draw down is simply a statistic that offers some estimation of the overall rate of return on an investment. The danger in this measure has something to do with the disadvantage of the standard deviation with hedge funds.

That means that hedge funds shouldn’t be operating very consistently and predictably in order for the standard deviation and the draw down to be quite useful. That would also render them essentially unnecessary.

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