Stocks have several pros and cons associated with them. Stocks are a great option if you know what companies you want to invest in. They are also a great option if you are interested in day trading. While stocks offer you flexibility and control over the diversity of your investment portfolio they require a lot of work to keep your portfolio properly diversified. A lot of financial experts recommend that your investment portfolio contain investments in at least 20 different companies and in at least 10 different industries. Making this many stock selections can be difficult to do.

Mutual funds are another investment option that you have. A mutual fund is basically an investment set that is controlled by a financial management company. This management company selects the stocks, bonds and other investments that are held by the mutual fund. Mutual Funds are a great way to easily diversify your investment portfolio. The management company does all of the leg work for you. While mutual funds are a great investment option they do have a few drawbacks. The first drawback is that they charge management fees and carrying fees. These fees cut into your profits and investment capital. The second drawback is that the performance of the mutual funds depends partially on the management company’s ability to select good investments and the company’s ability to manage the fund’s investment portfolio. Another drawback to mutual funds is that you don’t have any say in which investment products the mutual fund invests in. Because of this the fund may invest in a company that you would prefer not to invest in, or they may select an investment product that you think is a bad investment. Finally, mutual funds are susceptible to fraud. In recent years there has been several high profile fraud cases filed against mutual fund management companies.

Are hedge funds a suitable investment for you? Hedge funds are an appropriate investment for qualified purchasers with a net worth above one million dollars and an annual income exceeding two hundred and fifty thousand dollars. Purchasers are often required to sign an acknowledgement confirming their qualifications to invest in hedge funds. However, just because one is qualified to invest in a hedge fund doesn’t necessarily mean they should do so. There is a major problem with this type of investment. Oftentimes, the risk associated with the fund is misrepresented, leading to investors being misguided into skewing their qualifications.

The term “hedge fund” is a generic term used to describe many unique investments. Put simply, the phrase is derived from the purpose – hedging the risk of investing. Hedge funds provide lower long-term returns in exchange for less volatility. The form of investment is not new, but their popularity certainly is. The newfound popularity of hedge funds has left many investors wondering what they are all about.

To shed a little light on a decidedly illusive investment tool, a quick run down is necessary. A hedge fund is typically a privately organized pooled investment fund, predominately invested in publicly traded securities. They are normally created as limited partnerships, consisting of one general partner and up to one hundred limited partners. The general partner usually receives a management fee and 10-20% of the profits from the fund. The success or failure of a hedge fund is often dependant on the competency of the fund manager, since they are more aggressively managed and traded than traditional mutual funds.

It should be noted that hedge funds have a higher failure rate than traditional funds. Numerous hedge funds fail by the second or third year of operation. Also, hedge funds are less transparent than traditional funds because some hedge fund managers do not reveal the securities they hold, or the extent to which they are leveraged. Hedge funds may have a higher turnover rate and be less tax efficient than traditional funds.

Along with the aforementioned downfalls associated with hedge funds, several more negatives should be noted. The management and performance incentive fees charged by the hedge fund manager, together with the trading costs and administrative fees can quickly add up, making B share mutual funds seem like a bargain. As stated earlier, only “qualified” purchasers are eligible to invest in hedge funds, leaving many would-be investors out in the cold. And liquidity, if available, is limited to quarterly release, and even then, investors are left at the mercy of the hedge fund manager.

The bottom line is, when dealing with hedge funds, get educated about your investment before jumping in. Discuss the option, both pros and cons, with your dealer, and know what you are getting into.