Target date funds are the most popular type of fund of funds, says Steve Athanassie, CFP. In each separate type of fund of funds, you may find fettered funds-meaning they only invest in funds held by the same management company, like Fidelity or Vanguard-or unfettered funds, meaning they invest in funds held by any management company. Types of Funds of Fundsįunds of funds are available to meet a range of investment styles and goals. In a sense, when you invest in a fund of funds, you’re “hiring a ‘general contractor’ to complete research on other managers, balance overall risk and make sure the entire ‘project’ runs smoothly,” says Brent Weiss, CFP, co-founder of Facet Wealth. “A fund of funds is just an iteration of this, but rather than investing in a particular mutual fund, you are investing in a group of funds chosen, filtered and selected by the fund of funds company,” says John Matina, co-founder and director of finance at PARCO, a startup aimed at helping Americans prepare for retirement and manage their pensions. This gives participants the benefit of having a professional manager select investments for them while spreading out the risk across many individual securities. With mutual funds, ETFs and hedge funds, investors buy shares and fund managers put the capital to work in assets like bonds and stocks, depending on the fund’s investment strategy.Ī short-term municipal bond fund, for example, would use its investors’ money to build a portfolio of short-term municipal bonds. When you invest in a fund of funds, you get an entire diversified investment portfolio at once, featuring broad exposure to many different asset classes with less risk involved. They are using their skill at interpreting information to actively exploit an inefficiency in the market.A fund of funds is an investment vehicle that invests in mutual funds, exchange-traded funds or even hedge funds. Active Management Focus – hedge fund managers are applying strategies they believe will add alpha.Absolute Return Focus – hedge funds concentrate on making positive returns in all kinds of markets–achieving an absolute return. ![]() Downside Protection – since hedge funds can hold both long and short positions, they usually are less volatile than typical long-only portfolios, and some funds can provide a layer of protection in a declining market.Diversification – hedge funds add a level of diversification to an investment portfolio, since their returns are often not correlated with those of other asset classes.Hedge funds can make sense in an overall portfolio context, for a number of reasons. This enables them to have a lower minimum investment, and an unlimited number of investors (3c1/3c7 funds have limits). However, some hedge funds choose to register with the SEC. ![]() Hedge funds are prohibited from advertising their funds to the public. That is why a hedge fund partnership may often be referred to as a “3 c 1” or a “3 c 7” fund. Many hedge funds rely on sections 3 (c) (1) or 3 (c) (7) of the Investment Company Act of 1940 to avoid registration and regulation as investment companies. It can also be an entity with assets exceeding $5 million.Ī qualified purchaser is someone with over $5 million who invests in total assets, or one of a number of entities. An accredited investor is an individual whose net worth exceeds $1 million, or whose income in the last 2 calendar years exceeds $200,000/yr, and who expects more of the same. These are entities, or wealthy individuals that must pass either an “accredited investor” test or a “qualified purchaser” test. “Sophisticated investors” do – those who do not need the protection provided by the regulations that apply to mutual funds. You may hear the term “absolute return” used in conjunction with hedge funds, this describes how investment strategies are designed to generate returns in both good markets and bad. ![]() Perhaps the widest definition of a hedge fund is an alternative investment portfolio used by a group looking for above market returns. To simplify the definition of a hedge fund, you have to look at the investor’s objectives, classification and look at hedge fund strategies typically used by the fund manager. These alternative investments are called hedge funds. The issue of shielding an investment from market risk is attempted (although not always successful) with alternative investments that try to mitigate loss and preserve capital. Throughout time investors have looked for ways to maximize profits while minimizing risk. A simple hedge fund definition is: a hedge fund is an alternative investment that is designed to protect investment portfolios from market uncertainty, while generating positive returns in both up and down markets.
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