22 Hedge Funds There are no specific rules governing hedge fund pricing. Hedge fund investors may be unable to determine the value of their investment at any given time. Hedge fund investments are usually illiquid, with most investments made on a long term basis, so investors are usually aware of this and hence daily fluctuations in the market are not of great importance.
10 Investor Characteristics Mutual Funds “The only qualification for investing in a mutual fund is having the minimum investment to open an account with a fund company, which is typically around $1,000, but can be lower. After the account has been opened, there is generally no minimum additional investment required, and many fund investors contribute relatively small amounts to their mutual funds on a regular basis as part of a long-term investment strategy”. 23 Mutual funds generally target a wider base of prospective customers. They are more retail oriented and there are no restrictions on advertising of their products. Generally mutual fund products are made for easier accessibility for “average people”. Hedge Funds A considerably larger investment is required from hedge fund investors. Under the Investment Company Act of 1940, certain hedge funds may only accept investments from individuals who hold at least $5 million in investments. This measure is intended to limit participation in hedge funds and other types of unregulated pools to sophisticated investors. 24 “Hedge funds can also accept other types of investors if they rely on other exemptions under the Investment Company Act or are operated outside the United States.” 25 More recently, with the rapid growth of the hedge fund industry, hedge funds have begun attracting more institutionalized investment (for example from firms such as Merrill Lynch, etc.).
11 2.2 Leverage Hedge funds try to deliver the most attractive rates of return possible. In their ongoing quest to maximize their returns, hedge funds utilize investment tools that enable them to take advantage of opportunities in the market. Leverage is one such tool that has been used widely amongst hedge funds, and has had varied results, from facilitating exponential returns on investments to causing the collapse of many hedge funds. Leverage can be defined in numerous ways. “As a general matter, however, leverage, can be viewed as a means of potentially increasing an investment’s value or return without increasing the amount invested.” 26 Leverage is the practice of using borrowed money to make investments in order to maximize returns. Leveraging (i.e. buying on margin) is like taking out a mortgage to buy a house. 27 Mortgage lenders are typically willing to lend 80% or more of the value of the house. In the securities business, brokers will typically lend about 50% of the value of stock to be purchased. However, the broker will not lend funds against stocks that are viewed as “risky”.
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- Fall '15