I need 2 know all about hedge funds. I heard I can use borrowed money 2 invest in them. Is this true?

Question

I need to know exactly what they are. What type of companies offer them? How are the similar to mutual funds? How are they different? What is the usual minimum investment?

Answer 1

Hedge funds use pools of private capital to invest in various companies and generally require a minimum investment of $50,000 to $1,000,000. There are many different types of hedge funds but most concentrate their investment on non-publicly traded companies. Hedge funds are usually formed/managed by private investment capital groups.

Mutual funds also vary greatly; however they mostly focus on publicly traded securities (corporate and capital) for the bulk of investment. Mutual funds minimum investment can be as little as $10.

You can use borrowed money (a "margin account") to invest however it's very risky. In the event the hedge fund loses its value, you are stuck with a huge bill. Also, if the interest rate you are paying on the margin account exceeds your return on the hedge fund, you end up losing money.

Answer 2

If you know nothing about hedge funds and do not have an advisor who has recommended them, chances are they are not appropriate for you. And regardless of one's desire to invest in them, hedge funds are open only to accredited investors.


Addendum: I've been downgraded, likely because I did not communicate clearly. I am not necessarily trying to discourage you from investigating hedge funds; I am saying that the likelihood is that you are not eligible to invest in them. It is ILLEGAL to sell shares in a hedge fund to anyone who does not fit the SEC definition of an accredited investor.

The definition of accredited invester, per Investopedia:

In order for an individual to qualify as an accredited investor, he or she must accomplish at least one of the following:

1) earn an individual income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to reasonably maintain the same level of income.

2) have a net worth exceeding $1 million, either individually or jointly with his or her spouse.

3) be a general partner, executive officer, director or a related combination thereof for the issuer of a security being offered.

These investors are considered to be fully functional without all the restrictions of the SEC.