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Are hedge funds making a fortune from the China crash – and if they are such amazing money-making machines, how do I buy in? Read this: Are hedge funds making a fortune from the China crash – and if they are such amazing money-making machines, how do I buy in? If hedge-funds are such amazing money-making machines, why aren’t they listed companies that the City and small investors can buy into? Some hedge funds have done very nicely indeed out of the global market turmoil triggered by concerns about the Chinese economy. 225million for himself and his investors because he saw the crisis coming well in advance.
Odey previously cashed in when he predicted the credit crunch. Hedge funds use a variety of strategies to make money. Some can be very complicated, but the classic one is simply ‘shorting’ stocks, or betting they will fall. Hedge fund managers and their backers are normally extremely well off already.
That means they can afford to take a hit when their bets come unstuck, as they often do. But this also tends to leaving ordinary investors sitting enviously on the sidelines when the ‘hedgies’ do manage to strike it rich. That said, there are ways to get exposure to hedge funds if you are willing to shoulder the risks and can withstand the potential losses. Some operate as investment trusts which are listed on the London stock market and can be bought like other shares. See below for an explanation of how investment trusts work.
But investors are advised to do their research thoroughly before choosing hedge funds over more mainstream investments – including the sky-high fees they often levy, and whether the possible rewards are really worth the hefty price of admission. We asked a couple of investing experts to explain more about how hedge funds work and how to buy in if you want. You can also find a rundown of listed hedge funds below, and a full list of all investment trusts here. It’s true that hedge funds are normally accessible only to very wealthy individuals and institutional investors. However, there are several listed companies that allow private investors to access these strategies by buying shares on the stock market just as you would in any other listed company.
These listed hedge funds can work in two ways. Hedge funds use a wide variety of different strategies, but usually have the aim of delivering returns that are not correlated with other assets, such as stocks and bonds. If the first company does better than the second, the fund makes money: even if both do badly. Alternatively, they may be exposed to alternative assets, such as currencies or commodities, or try to exploit very small differences in the price of an asset between one region and another. If hedge funds are successful, they could provide useful diversification to a portfolio, especially when stock markets fare badly.
However, investors should remember that listed hedge funds are themselves equities, and so their share prices are affected by market sentiment. Most hedge funds are nothing else but glorified gambling funds that charge the earth to investors. Typical fees are 2 per cent per annum plus a 20 per cent performance fee. They are funds that in the main take large bets on asset classes either by betting against them or buying heavily into them. They tend to be targeted at high net worth investors. The majority are not that successful, but you don’t tend to hear about all the failures. Some funds such as RIT Capital Partners investment trust use hedge funds to help them offer greater diversification and buying into funds like this is a far better way to access them.
One other point is that most funds are unregulated and therefore there is no investor protection should things go wrong. HOW DO INVESTMENT TRUSTS WORK – AND WHAT IS ‘NAV’? Investment trusts are listed companies with shares that trade on the stock market. A trust’s price can fall below the total value of its holdings if it is unpopular and people do not want to invest but do want to sell.
This pushes down demand and drives up the supply of its units for sale. An investment trust trading at a discount to NAV may be regarded as cheap because the shares cost less than its overall value – although there might be good reasons why, such as investors being justifiably pessimistic about its prospects. Investment trusts tend to be a lower-cost option than funds, with no initial charge and lower annual fees. However, buying them incurs share-dealing charges.