What are Hedge Funds?
Hedge Funds are a type of investment fund that uses pooled funds from high net worth individuals or institutional investors and employs different risk management techniques to earn active returns for their investors.
Because of the nature of their investment pattern, they are generally only accessible to qualified investors.
Hedge Funds in Nigeria – How They Work
In Nigeria, they are often managed by a Fund Manager who invests the investor’s money into different assets to achieve the fund’s goals.
Typically, hedge funds have different goals like long term equities or private equities. Regardless of what the funds’ objectives are, they aim to earn from their investments despite market fluctuations.
The fund manager raises money from a pool of outside investors. He then invests it according to the strategy and operational agreement he has made with these investors. Depending on the agreement, the manager can either invest in hedge funds that;
- Invests only in long-term equities. This often requires investments in common stocks. They invest in a duration of 2 – 5 years earning dividends.
- They could also engage in private equity operations. This is done mostly by buying the entirety of privately held businesses. They often take them over, improving processes, providing networking opportunities, play advisory roles. They could also launch the company into an initial public offering
- Trading in several government bonds. One of the fund manager’s professional abilities is understanding the bonds market.
- Some fund managers are real estate experts as well.
Apart from the examples mentioned above, fund managers can invest in just about anything. There are even some fund managers who specialize in investing in other hedge funds.
Fund Managers’ Fee
The fund manager earns from investing in other people’s money. They are compensated based on an operating agreement between themselves and the investors. While some fund managers are receive pay based on capital invested and profits made, some get their money solely on profit.
Who Can Invest in Hedge Funds?
Typically, only accredited investors are eligible to invest in these funds. They can be an individual or an organization. These investors are high net worth individuals who meet the requirements of the government regulations of investing in hedge funds.
However, hedge funds in Nigeria are not under the cover of some guidelines that protect everyday investors. This makes them a riskier form of investment.
Risks Associated With Hedge Funds
As mentioned earlier, Hedge funds are prone to higher risk. The returns from investing must be measured with the investment’s potential risks.
Hedge funds can leverage more on speculative transactional behaviour, which is more likely to end in losses when the market falls.
The managers are more than ready to put themselves under such pressure since they receive payment based on results.
It might be difficult to pull out investments since hedge funds are illiquid investments.
Given this, they are not redeemable at the investor’s choice of time. In other words, investors may not be able to pull out of the investment pool they have invested at the time they want out.
The lack of a firm regulated oversight of activities by the market regulators make it riskier to invest in them. You can check out this post for the best investment in Nigeria.