Hedge Funds Require a Long-Term Commitment
Interval funds also much more flexibility than hedge funds do. When an investor first joins a hedge fund they must accept a “lock in” period that guarantees they’ll leave their money in the fund for at least one year. After that they may leave the fund at set intervals – 6-month intervals are common.
Compared to hedge funds, interval funds are much more liquid. Investors can’t opt out whenever they want, but they aren’t “locked in” for extensive periods either. Investors can buy into the fund whenever they like and they can leave at set intervals that are predefined. These intervals may be as little as one month or as much as six months.
Risk and Reward
One of the great attractions of the hedge fund for those that qualify is the possibility of above average returns. Mutual funds are limited in use of leverage (purchasing securities on margin). Hedge funds are not. Mutual funds are limited in the level of short selling that can take place in the fund. Hedge funds are not. Mutual funds are limited to publicly listed securities for typically 90% or more of the mutual fund portfolio. Hedge funds can purchase unlisted securities. With additional opportunity comes additional risk, and there’s a chance the funds may be hit with substantial losses instead of large returns. This high degree of risk is one of the main reasons that these funds are only open to accredited investors that can potentially absorb any losses. If the fund managers explain their investment strategy to its investors ahead of time they can manage it as they see fit.