How Do You Choose Good Hedge Funds?


Quick Answer

Many professional investors use absolute value guidelines such as the highest-performing hedge funds over a period of years or 20 percent or more returns year-over-year, explains Investopedia. There are thousands of hedge funds, so professional investors narrow their search to specific guidelines.

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Full Answer

Hedge fund investors also use relative performance guidelines, which compare hedge funds that have similar investment strategies, according to Investopedia. For example, an investor uses relative performance guidelines to compare one fund with a long-short equity position and compares the performance of that fund to another fund with the same long-short equity position investment objective. From there, the investor builds a portfolio of quality hedge funds based on the information gathered from the relative performance guidelines.

Hedge funds are high-dollar investments for large institutions, such as pension funds or money-market mutual funds, or investors with significant amounts of capital, notes Barclay Hedge. Well-known banks and financial institutions, such as Goldman Sachs and Morgan Stanley, sell hedge funds. Hedge funds are similar to mutual funds where investors buy large pools of underlying assets that comprises the mutual funds. However, hedge fund managers take more risk than mutual fund managers, and the Securities and Exchange Commission does not regulate hedge funds as of 2015.

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