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Have You Joined the Bandwagon of Hedge Fund Stocks? (Part 2)

16 October 2007 - Features - Editor

Hedge funds have begun to open up to retail operators from the world of stocks. This favorable trend is accompanied by growing global investment shares for hedge funds in Australia, Hong Kong, and Singapore. The time is ripe for everyone who has been limited to conventional investing in stocks alone to move some parts of their portfolios in to hedge funds.

Fraud is a big risk with hedge funds. Therefore new entrants need a series of safeguards. A major issue is to start with a country, which has the most comprehensive sets of regulations and controls on hedge funds. Though the United States does not require public identity disclosures by all stakeholders in hedge funds, it does have adequate security controls to keep out undesirable and insurgent elements. The country also offers substantial advantages to offshore hedge funds, subject to some conditions.

India in rather stark contrast to the United States allows foreign hedge funds to operate through promissory notes. The rules of disclosure are not very clear, and may even some domestic stocks experience a factor in the unusual value growths. The situation varies in other countries. Overall, an offshore hedge fund in the United States would be a learning first step for newcomers. Moreover, participating in hedge funds will allow small investors to get exposure and insights to how their managers operate. However, this is possible only if one chooses a hedge fund with abundant transparency, where managers take the time to explain their thinking and strategies to clients.

It can be easy for first timers to be misled by the mere sizes of hedge funds. Some of the most suitable ones may not be particularly large. Very successful ones, on the other hand, may be prone to abject failures if they do not have proper systems in place. Inadequacy of funds, unauthorized trading by rogue staff, and poor back up, are some of the common reasons behind hedge fund failures. Investors should not join hedge funds without searching looks in to their operating infrastructures and controls. Such insights can be hard to obtain, so most people have to rely on images and projected branding by the best-resourced financial institutions.

A Crucial Difference between Blue Chip Stocks and Hedge Funds

Do not let the glamour that surrounds hedge funds lull you in to complacency! Hedge fund operations need constant vigilance. It is not like ironclad stocks that you can hold on to forever with only occasional admiring glances. However, the benefits of constant scrutiny are substantial for all investors. One learns to manage risks better, learns the ways of prudent investing, and how to protect capital before aiming for rapacious profits. The latter have made hedge funds famous, but the truth behind their ways is far more conservative than widely imagined.


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