Elements of Private Investment Funds
Private investment Funds are structured as Limited Partnerships and are managed by the General Partner, or by another investment advisor who reports directly to the General Partner. These funds are offered privately to Accredited or Qualified investors who meet the standards for minimum net worth or other specific requirements. Investors are ‘accepted’ into the Partnership as limited partners by the General Partner.
Most funds have an initial investment period that restricts redemptions or withdrawals from the fund. Private Investment Funds have two types: Hedge funds, which invest in securities and financial instruments similar to other pooled investment vehicles; and Private Equity funds, which purchase or invest directly in companies, real-estate, business assets and debt, and other similar items.
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.
Key Takeaways for Hedge Funds
As an investor, you should consider several things before investing in a hedge fund.
- Hedge funds are private pooled investment vehicles that invest in other securities and financial instruments in pursuit of a specific investment objective, often with higher returns than is expected from an associated market index.
- Hedge funds are not accessible to all investors. The total number of investors in a fund is often limited due to regulations concerning exemption from registration, and investors are required to meet specific wealth, income, or other specific criteria to be eligible.
- Hedge funds are also known as ‘Alternative Investments’ because they frequently use investment strategies not found in public funds. These strategies can be high- or low-risk but are often designed to provide higher 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.
- These funds typically have contribution minimums and redemption-timing restrictions. For this reason, they are suitable for buy-and-hold strategies in longer-term investment plans.