| In 1949 Australian Alfred Jones was credited with | | | | have been regulated away from the interests of |
| the term "hedge fund". Historically it derives its | | | | the small investor. In fact, these are the exact |
| name from the use of hedging to manage risk | | | | investors which need safety of capital most of all. |
| while achieving superior returns. Today, a hedge | | | | Many market observers believe the industry has |
| fund is an un-regulated investment vehicle | | | | become over regulated and as such, do more |
| designated for sophisticated, also known as the | | | | harm than good. |
| "Accredited Investor". | | | | To-date, the hedge fund industry has been able in |
| Mutual funds gained popularity in the 1980's. Prior | | | | all country jurisdictions to avoid nuisance |
| to this time, the problem of the small investor | | | | government meddling. The recent wall street |
| was in obtaining sufficient knowledge to make | | | | initiated financial melt down has proven that even |
| informed investment decisions, and so the | | | | a self regulated industry is not immune. It seems |
| average person avoided stock market investing. | | | | big company rights take precedence over |
| Instead money was held in traditional savings | | | | investor rights. So some regulation may be forth |
| accounts or placed with a bank in a Guaranteed | | | | coming. Historically, the hedge fund industry has |
| Investment Certificate ("GIC") or Certificate of | | | | been able to avoid regulation by offering its |
| Deposit ("CD"). | | | | products only to the Accredited Investor. There is |
| What to do. The small investor was not able to | | | | a strict agreed upon formula based on wealth |
| obtain a professional money manager without $10 | | | | accumulation. The premise being if you were |
| million or more to start. But what if he could pool | | | | smart enough to accumulate wealth, then you are |
| his money with other small investors to reach this | | | | smart enough to understand the sophisticated |
| minimum threshold. And so the mutual fund was | | | | investments being recommended. |
| created to address these exact concerns. | | | | Typically hedge fund investors are in direct |
| The mutual fund concept was simple, allow the | | | | contrast to mutual fund investors and thus have |
| un-sophisticated investor access to the strategies | | | | different needs. The mutual fund investor has |
| of the professional money manager. This was | | | | modest wealth and little investment knowledge. |
| done by pooling small sums of money, as little as | | | | The hedge fund investor has significant wealth |
| $20.00 deposited monthly. In return, the fund | | | | with greater investment understanding. Therefore |
| company would use professional money | | | | one is regulated to protect the investor and the |
| managers using professional investment strategies | | | | other is not. |
| to easily out perform traditional bank savings | | | | The above description is not the only difference |
| products. | | | | that separates the two. Hedge funds can employ |
| The mutual fund investor had other problems. | | | | a complex strategy of investment vehicles known |
| Because they did not understand the nature of | | | | only to the fund manager. Many hedge fund |
| the investments made for them, government | | | | managers are protective of any proprietary |
| regulators got involved to protect investor rights. | | | | trading formula which will provide an edge over |
| And so mutual fund investing became regulated | | | | their competition and disclosure of their trading |
| and soon took on a life of its own. Rules were set | | | | style is not required. |
| in place to govern what could be held within a | | | | Mutual funds are sold through an Investment |
| mutual fund and how the investment strategies | | | | Advisor who will make comparisons, explain and |
| were marketed to the public. Even what could be | | | | make recommendations for a balanced portfolio. |
| invested and what should be avoided. | | | | Hedge fund investing can be more difficult. Firstly, |
| While much evolution has transpired since the | | | | there can be difficulty in locating a list of the |
| early days of the 80's. One thing is for certain, | | | | availability of funds. There are however helpful |
| mutual fund investing is all about what it cannot | | | | data-bases for this. Then you must undertake |
| do. While this article is not focused on these | | | | your own due diligence to ascertain if it is the |
| issues, there are some glaring examples the | | | | right asset mix for your overall portfolio. |
| investor needs to know. In times of market | | | | Thirdly, you'll need to have an understanding of |
| un-certainty, the mutual fund cannot sell and | | | | the different investment strategies. Do you |
| move to cash for safety. The manager must | | | | choose a value fund or a growth fund. CTA funds |
| remain fully invested at all times making the | | | | are out performing these days and what about a |
| investor, in consultation with his Investment | | | | suitable bond fund. Does my fund employ hedging |
| Advisor, responsible for proper asset allocation. | | | | and should I invest in an off-shore fund to obtain |
| The mutual fund also cannot employ risk | | | | the tax benefits. |
| management or hedging techniques because they | | | | There are certainly many things to think about |
| are deemed too sophisticated for the small | | | | when selecting the proper investment vehicle. |
| investor to understand. So to avoid investor | | | | Make your selection with intelligence and proper |
| complaints, these important strategies are | | | | planning. Ask around and be inquisitive. Your level |
| discouraged by managers and outlawed by | | | | of investment knowledge and the time needed to |
| regulators. | | | | devote to this topic will dictate which is best for |
| In the end, all of the benefits started by the | | | | you. |
| mutual fund industry to provide safety of capital | | | | |