How Normal Investors Can Use the Same Strategies as Hedge Funds.
Updated: Aug 14, 2018
In a Warren Buffett note from 2006, he credits the famous value investor Benjamin Graham as the co-creator of the first-ever hedge fund in the mid-1920s.
“It involved a partnership structure, a percentage-of-profits compensation arrangement for Ben as general partner, a number of limited partners and a variety of long and short positions,” Buffett’s letter says.
That means that hedge funds have been around for nearly a century – and they have almost exclusively existed as a vehicle for institutions and wealthy, private investors.
The initial use of the hedge fund was to “hedge” specific investments against the general volatility of the market. Despite this namesake, today hedge funds use a number of strategies to target gains.
While retail investors rarely had access to these types of strategies, today it is possible to buy mutual funds or ETFs that try to emulate similar tactics. These alternative investment funds, or alt-investments, come in mainly two varieties:
Return Seekers: Designed to help boost performance by opening up new opportunities to investment, such as private equity or global infrastructure.
Risk Managers: Designed to help smooth performance when markets turn choppy. Strategies include long/short equity, merger arbitrage, managed futures, and other hedge fund strategies.
The key here, in our opinion, is that these strategies may allow investors to diversify out of traditional markets such as stocks and bonds.
The timing for alternative investments could be good as well, as the start to 2016 was the worst in history for markets and the average investor already lost 3.1% in 2015.
Although funds specializing in alt-investments typically have significant diversification benefits, they also usually come with higher fees in comparison to more traditional offerings. Investors should weigh the cost-benefit accordingly.
For the avoidance of any doubt, nothing on this website is intended to constitute advice to you and the content is displayed for illustrative and information purposes only.
Oakmount and Partners Ltd. Est 2009.
Sculpted from experience, built for success.
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