Truths About Hedge Funds

It’s only a vehicle for investing, albeit one that happens to be less constrained than most. Your run-of-the-mill mutual fund, for example, buys stocks and bonds, and that’s pretty much it. Most are not even allowed to employ short selling, a way of betting that the price of a security will fall. Hedge funds can employ whatever investing tools they want, including leverage, the use of derivatives like options and futures, and short sales. The New York Times decided years ago to incessantly refer to hedge funds’ use of these instruments as “exotic and risky,” thereby adding to their aura of mystery. The funny thing: Practically all financial institutions use these “exotic” instruments.

Hedge funds are not regulated and consequently aren't required to make the same detailed financial disclosures that are required of publicly traded companies.

Hedge funds are not required to file reports with the U.S. Securities and Exchange Commission. They are supposed to make money all the time, and when they fail at this, their investors redeem and go to someone else who has recently been making money. Every three or four years, they deliver a one-in-a-hundred-year flood.

Hedge funds operate in private, but they often affect the public. Many market-watchers believe that hedge fund managers -- nervous about holding on to assets overnight -- sold stocks in such massive amounts that they caused the recentsteep declines in the Dow Jones industrial average that haveoccurred repeatedlyjust before the market closed.

Hedge funds often present many different barriers to withdrawal, and there are essentially no regulatory prohibitions on these barriers.

Certain hedge funds may only accept investments from individuals who hold at least $5 million in investments.