There are so many things you can do if you have an investible amount of one million dollars. You can buy a second home or a rental property or maybe you are looking at this nice vacation home in the Caribbean. You can even start a small to medium size business with that amount of money.
The other idea would be investing this money in the stock market. Let’s say that for the sake of this article, you decided that stock market investing is the path that you want to take.
The next question will be, are you going to self-managed your investments or would you hire a Hedge Fund Manager? To Hedge or not to Hedge! The answer to this question is most likely as varied as there are investors.
This is not a one size fits all answer. It has to depend on each individuals case but for the sake of this article, let’s consider the following scenario:
- You still have a mortgage of let’s say $200,000.
- You’re between 35- 45 years old and married with at least one child
- No other debts
- Both you and your spouse are working full time
- One million dollars of investible money
- You qualify as an investor based on the Hedge Fund’s eligibility requirement.
There are many reasons for this and we will delve into several of them by first defining what a hedge fund is in the first place.
So now let’s start and talk about Hedge Funds.
Hedge funds are pooled money of investors. They are similar to mutual funds, so think of them as mutual funds on steroids. It is the steroid part that makes them so much different.
They are considered alternative investments as they traditionally have not been regulated by the Security and Exchange Commission (SEC) like mutual funds. At least not yet. As such, they invest in a wider range of securities, much more than stocks, bonds or Exchange Traded Funds.
How does one become a Hedge Fund Manager
Well, they usually are required to have a Masters degree in finance with either a Certified Financial Advisor (CFA) or Chartered Alternative Investment Analyst (CAIA) certification. Most of the time they start off as a financial analyst working for a financial firm and work their way up to become a portfolio manager. They are usually compensated depending on the returns they earn for their investors.
The Hedge Fund Manager also invest in derivatives such as options or futures. They will use both long and short strategies. These types of funds will invest also in commodities and real estate. Hedge funds can and do use borrowed money for leverage in their investment strategies.
Basically, it is a type of fund that uses a wide variety of strategies to seek higher returns or what is known as alpha. This puts these funds in the extremely risky category.
Hedge funds are not considered liquid investments. Unlike buying individual shares of stocks, you cannot simply sell your shares except during the non-lockup period. This is an important consideration.
These types of funds are for accredited and sophisticated investors. By accredited, this means an investor who has at least a minimum of $500,000 or more of investible money excluding their personal residence. In other words, most of the time a Hedge Fund Manager only deal with high- net worth clients.
In answer to the question would you hire a hedge fund manager if you had one million dollars should come with at least the following considerations:
- Do you have another million that is conservatively invested? If yes then maybe you can hire the hedge fund manager.
- Have you done your research on the hedge fund manager and are comfortable with the track record of the manager? If yes then maybe you can invest your million
- Do you understand the various investments that will be in your portfolio to such a degree that you could explain each one to another person so they would understand? If no then you should not invest until you do
- Are you willing to absorb the short-term losses and keep this as a long-term investment? If no, then you should not invest.
- From a psychological and emotional point of view did you get this million from an inheritance, a lottery or your hard earned savings through the years? The answer to this will determine the answer from an investment psychological risk perspective. The source of the million is important to your own understanding of whether or not you should invest.
- Do you have at least $100,000 of income coming in each year to sustain and make up for any losses that may occur in a hedge fund? If no, then maybe your million dollars is better invested elsewhere.
- Hedge fund fees – Yes, they can be expensive. According to a dummies.com article, Hedge Fund managers receive two types of fees, management fees and performance fees.
If I will be the investor in the exact situation as shown above, and I have one million dollars, here’s what I would most likely do after considering everything from the above list:
- Pay off my mortgage – One of the best feelings is the feeling of security and by paying off my mortgage will definitely give me peace of mind and pride. This is extremely important to me.
- Set aside $100.000 as an emergency fund – Again this is also about feeling safe and secured.
- Invest $200,000 in individual stocks and managed it myself – I have been trading stocks for over a decade now and do like investing in the stock market a lot. I like the excitement and enjoyment of the stock market game.
- Hire a Hedge Fund Manager and invest the remaining $500,000. Hey, why not. I’ll give it a shot! I would most likely look for a more short-term fund base on the recommendations of the manager.
Again, that’s what I would do. What about you?
As you can see, there are a lot of moving parts when it comes to hedge fund investing. What may very well be right for one person may not be right for another person? Only you can answer this question if you had one million dollars.
I was just trusting to give you a few pointers to help you consider this if you were fortunate enough to have that extra million or two.