Hedge fund evolution

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These days, financial professionals note, most hedge funds cast a much wider net. They expose investors to tried-and-true assets like stocks, bonds and mutual funds, but also to real estate, currency, technology and riskier bets like derivatives and distressed companies.

While retail investors can buy shares in some of the world’s largest hedge funds, like BlackRock and Invesco, on the stock market, investing directly in a hedge fund typically requires you to be an “accredited investor.”

In Canada, that term applies to more than 20 different personal financial scenarios. The most common includes holding assets of more than $5 million or earning a gross income of more than $200,000 annually for two years in a row — and expecting that income to grow during the current calendar year.

By offering exclusively to accredited investors, who can occasionally afford to take losses, hedge funds are able to invest aggressively. That can lead to eye-popping risks and commensurate returns, like when Scion Capital, the hedge fund managed by Michael Burry, shorted the U.S. housing market in 2008 and wound up earning his investors a reported US$700 million.

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Less liquid, less transparent, and sometimes higher fees

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In addition to the complexity of some hedge fund strategies, financial managers say there are other potential drawbacks for investors new to the space.

Unlike mutual funds and other exchange-traded equities, hedge funds don’t let you retrieve your capital whenever you like, making them somewhat illiquid. They also don’t have to report their dealings to the public in the same way stocks and mutual funds do, so getting accurate information on a fund’s performance can be a challenge.

Committing to a hedge fund can also mean paying some steep fees. Hedge funds have typically operated on a “two and 20” approach, meaning you’ll pay a management fee equivalent to about 2% of the assets under management and a “performance fee” of around 20%. But most hedge funds won’t require you to pay a performance fee unless your returns exceed a predetermined benchmark.

Hedge funds can expose you to a level of excitement and ingenuity most investors never catch a whiff of, but the risks involved can be gut-wrenching. Just remember that you’ll be teaming up with investors whose careers are made by hitting upper-deck home runs. You have to expect, and be comfortable with, the occasional strike-out.

Fine art as an investment

Stocks can be volatile, cryptos make big swings to either side, and even gold is not immune to the market’s ups and downs.

That’s why if you are looking for the ultimate hedge, it could be worthwhile to check out a real, but overlooked asset: fine art.

Contemporary artwork has outperformed the S&P 500 by a commanding 174% over the past 25 years, according to the Citi Global Art Market chart.

And it’s becoming a popular way to diversify because it’s a real physical asset with little correlation to the stock market.

On a scale of -1 to +1, with 0 representing no link at all, Citi found the correlation between contemporary art and the S&P 500 was just 0.12 during the past 25 years.

Earlier this year, Bank of America investment chief Michael Harnett singled out artwork as a sharp way to outperform over the next decade — due largely to the asset’s track record as an inflation hedge.

Investing in art by the likes of Banksy and Andy Warhol used to be an option only for the ultrarich. But with a new investing platform, you can invest in iconic artworks just like Jeff Bezos and Bill Gates do.

About the Author

Clayton Jarvis

Clayton Jarvis

Reporter

Clayton Jarvis is a mortgage reporter at MoneyWise. Prior to joining the MoneyWise team, Clay wrote for and edited a variety of real estate publications, including Canadian Real Estate Wealth, Real Estate Professional, Mortgage Broker News, Canadian Mortgage Professional, and Mortgage Professional America.

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