Hedge funds are primarily non-public, collective investment vehicles used by investors which (typically) are looking for the highest possible profits and invest worldwide based on specific criteria.
As fringe banking entities, they have so far been subjected to very little government regulation, and are normally only accessible to a small circle of investors.
Originally, hedge funds were primarily used by businesses as a way of protecting themselves from risk. Today there are numerous hedge fund strategies ranging from classic hedging methods like reinsurance to strategies based on derivatives, currencies, stocks, futures or commodities to arbitrage and macro strategies.
New York and London are the epicenters of the hedge fund industry. Examples of well-known hedge funds, both past and present, are investor George Soros’ “Quantum Funds” and John Paulson’s “Paulson & Co”.
Other well-known operators are David Einhorn, Bill Ackman and Carl Icahn which, through their hedge funds, function as “corporate raiders” and bet on the upswing or downfall of companies listed on the stock market.
Switzerland hosts around 120 hedge funds, less than 2 percent of the world total. Even Sweden outdoes Switzerland in the number of hedge funds it hosts.
Much like in conventional wealth management, around 50 million Swiss francs is considered to be the minimum amount of assets required for a successful hedge fund.
Small funds don’t have it easy: around 90 percent of new money goes to large funds with more than 5 billion US dollars of assets under management. “Funds of hedge funds”, which “divide” investment assets into many separate hedge funds, typically only invest in the big players.
As in classic wealth management, hedge funds also normally charge administrative and performance-based fees. In addition to a cost comparison, it’s important to take a good look at the performance of various funds over recent years and to prepare a detailed fund strategy before investing in a hedge fund.
Direct investment in pure hedge funds is only recommended for experienced investors with a good understanding of complex investment vehicles. The high level of risk associated with hedge funds makes them a poor choice for small investors.