Basics of Private Investment Funds
Private investment Funds are usually structured as Limited Partnerships. They are offered privately to Accredited investors who meet the standards for minimum net worth. Investors are ‘accepted’ into the Partnership as additional partners once their application is accepted by the General Partner. The fund itself is managed by the General Partner, or by another investment advisor who reports directly to the General Partner.
Private Investment Funds have two types: Hedge funds, which invest in securities and financial instruments similar to other pooled investment vehicles such as mutual funds; and Private Equity funds, which purchase or invest directly in businesses.
Both types of private investment funds have investment objectives and strategies. Investors can find out more about these objectives and strategies by reading the documentation provided by the partnership concerning the investment.
What is a hedge fund?
As an investor, you should consider several things to consider before forming investing in a hedge fund.
- Hedge funds are private pooled investment vehicles that invest in other securities and financial instruments in pursuit of an investment objective, often with higher returns than is expected from an associated market index.
- Hedge funds are also known as ‘Alternative Investments’ because they frequently use investment strategies not found in public funds. These strategies can be risky but are often designed to provide high investment returns in short-term timeframes or target specific performance goals such as risk containment.
- Hedge funds frequently use leverage, short sales, and other hedging strategies to pursue performance - all elements that give this type of fund its name.
- Hedge funds are not accessible to all investors. The total number of investors in a fund is often limited due to regulations for their exemption from registration, and investors are required to meet specific wealth or income criteria. These funds also typically have contribution minimums and redemption timing restrictions. For this reason, these funds are suitable for buy-and-hold strategies in long-term investment plans.
Private funds are a great selection for investors who want an alternative investment that is professionally managed, but do not have enough time or do not wish to manage their own portfolios. Information on the fund describes the securities being held in the fund, what investment style is being used, and what the investment goal is. The underlying portfolio of a private fund can provide diversification, or reduce risk when being added to an already diversified portfolio. This information on the private fund will allow you to make an informed decision whether the fund is the right investment for your plan.