How do I Evaluate Hedge Fund Strategies?

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  • Written By: Luke Arthur
  • Edited By: Heather Bailey
  • Last Modified Date: 09 December 2019
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Hedge fund strategies are typically very advanced and utilize a number of different techniques when compared to a traditional mutual fund. In order to evaluate hedge fund strategies, you will need to look at several different factors. You will need to look at the risk level of the strategy, the potential returns, and the market that is being invested in.

Hedge funds are a type of investment vehicle that investors can put their money into in order to get superior returns. Hedge fund strategies use many techniques that a traditional mutual fund would not be able to employ. In order to get involved with a hedge fund, you have to be an accredited investor. This means that you have to make more than $200,000 US Dollars (USD) per year or have $1,000,000 USD in net worth.

The first thing you should look at when evaluating hedge fund strategies is the amount of risk involved. You want to compare the amount of risk of the strategy to your personal risk tolerance. If you are the type of investor who likes to play it safe, you will not want to invest in an aggressive hedge fund. Look at the amount of leverage being used in the hedge fund. If the hedge fund utilizes a large amount of leverage, the risk of the strategy is increased.


In conjunction with the risk, you should also look at the potential returns. The hedge fund will typically publish information about the historical returns that have been achieved with its strategies. While these returns do not necessarily tell you what is going to happen in the future, it is always good to see a history of success. If the hedge fund does not have a good risk/reward ratio, you will want to look elsewhere for your investment needs.

The last thing you will want to evaluate is the market in which the hedge fund is investing. Hedge funds have the freedom to invest in any type of financial market they want. Many hedge funds will diversify outside of the traditional stock market.

Instead of focusing on the stock market only, they will branch out into the commodities market, the Forex market, real estate, and precious metals. Make sure the securities that are being invested in match up with your personal investment needs. Many investors like hedge fund strategies because they utilize several financial markets instead of sticking to only stocks and bonds.


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