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What are hedge funds?

A friend of mine has invested with a hedge fund and has done very well but I am not sure about how safe they are. Could you explain what they do and their relative safety?

A hedge fund is not for average retail investors and has more been the domain of wealthy individuals and institutions. Hedge funds use aggressive strategies that are unavailable to common investment, managed or superannuation funds. That means they try things such as short selling, lots of leverage (debt), program trading and a whole range of exotic investments covered by what we call derivatives. Hedge funds have less rules and regulations, which can pump up their returns and therefore their risk. There are relatively safer funds but even their greatest supporters would be hard-pressed to argue that anyone in a self-managed super fund should have a big exposure to such funds. Some investors might put 5 per cent of their fund into riskier, higher returns but even then I think this should be the actions of a more sophisticated investor.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. 

Published on: Monday, March 22, 2010

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