Opening Up the Secret World of Hedge Funds - Part Two
The answer is simple: The same flexibility to invest in an unregulated fashion that allow hedge fund returns to flourish, can also cause them to be virtually unmarketable to the general public. The securities laws do not allow for the general advertisement and solicitation via mass marketing and communications. Knowledge about hedge funds generally travels by word of mouth.
By the time someone such as Seth Tobias, George Soros or Lee Ainslie III becomes known to the general public, the amount of available investment slots for their particular fund are long since gone. Offshore hedge funds aren't limited by the number of investors that they can accept, but with limited exceptions these funds are not open to US investors or can only be accessed through offshore trusts and offshore insurance products.
The typical fund manager spends on average two years to fill up his slots, while spin off funds, by known managers, fill up in a few days. Most funds close their door to new money, even if investment slots are available when they reach an optimal size. Most funds find this size to be between $500 million and $1 billion. This way they can quickly and nimbly move in and out of their positions and not attract attention from other funds.
For an established fund manager with a strong reputation, the minimum fund investment is generally $1 million to $3 million dollars. Again, the minimum level is set high because the onshore manager has only 99 slots to pass out and needs to attract the necessary capital to offer profitability and efficiency. Newer fund managers may offer initial slots as low as $100,000 in an effort to attract initial capital and then generally raise their minimums as they fill up their slots.
Recent developments in the securities laws allow for additional membership slots in private hedge funds for what are referred to as "super accredited" (over $5,000,000) investors. This has allowed for more hedge fund participation by not only the super wealthy, but also institutional investors. Some of these institutional "super accredited" investors have turned around and created their own "fund of fund" products that allow smaller investors to invest a lesser amount of money (some as low as $50,000) in a broader grouping of hedge funds.
Offshore banks and offshore insurance companies are also getting into the act by circumventing offshore hedge fund minimums by investing their own monies and then offering financial products to their clients "linked to the specific return of an individual hedge fund." While this has allowed for more people to get involved in hedge funds, it also holds down returns, since the fund of fund fees add an additional fee to the hedge fund manager's fee.
Additionally, spreading money over a wider array of managers reduces the chances that you will hit the jackpot with an individual "hot" fund manager, while also reducing the chances of losing “big”.
If you can't afford the minimums of individual fund managers, you still can seek out fund of fund products that are designed to deliver above average returns with lower volatility and little or no correlation to the US stock markets. Many can deliver 10% - 15% returns in good years and in bad.
Remember, hedge fund managers don't make money unless you make money and in over a decade of representing and working with hedge funds, I've never met a "poor" hedge fund manager. The markets would simply chew them up and spit them out. You won't find these opportunities advertised in Forbes or Business Week, but with a little persistence you can track down solid hedge fund opportunities and maximize your investment returns. It’s really quite simple. Put talented people in charge of your money and pay them a penny for every nickel they earn for you. Hedge funds give you that opportunity.
Copyright 2002 Nagel & Associates, LLC