What is hedge fund investing?
Investing in a hedge fund isn’t for everyone. On one hand, this alternative asset class is known for its high risk of capital loss; on the other, there’s still the possibility of financial success through intelligent, timely strategy. There’s a reason seasoned, high-net-worth investors look to hedge funds as a means of diversifying their portfolio.
In this blog post, we dive into all aspects of hedge funds and discuss what to consider when evaluating them as part of a broader alts investment strategy, including:
- What a hedge fund is and how it works
- Why investors consider hedge funds
- Trends in hedge fund investing
- How hedge funds compare to franchise investing
Let’s get started.
What is a hedge fund?
A hedge fund is a limited partnership (LP) of private investors, similar to a private equity fund. The investors are the limited partners while the hedge fund company serves as the general partner. The fund is run by professional fund managers who allocate pooled capital on behalf of investors with the aim of reaping above-average returns.
One feature of hedge funds that sets them apart from similar investment vehicles like mutual funds is the freedom fund managers have to pursue aggressive investment strategies. Hedge funds are not regulated to the same extent as traditional investments, so managers can utilize just about any means to garner returns across any market, including short positions, leverage, and derivatives.
Types of hedge funds
Hedge funds are typically classified by what strategy their manager(s) choose to implement or what type of securities they focus on. This includes:
- Activist hedge funds, which invest in companies with the goal of driving up stock prices by optimizing their operations;
- Equity hedge funds, which focus on both buying and shorting stocks, either in the global market or in a specific country;
- Global macro hedge funds, which aim to capitalize on market swings generated by geopolitical or economic events;
- Relative value hedge funds, which identify securities that are mispriced in relation to each other and take either long or short positions in order to generate returns.
Why invest in hedge funds?
Hedge funds have historically been favored by sophisticated, high-net-worth investors, particularly institutional investment firms.
Benefits of hedge fund investing
- Diversification: Because fund managers have substantial leeway in terms of how they invest, hedge funds can be an excellent means of diversifying a portfolio. Assets, markets, and strategies can be combined to generate a variety of sources of return and risk exposure levels. Some funds implement an allocation strategy designed to optimize positive returns in nearly any market environment.
- High return potential: While hedge funds invest in the same types of securities available to all other investors, they’re able to create and deploy unconventional combinations of these assets, which can generate higher returns than average. However, this return potential is near-wholly dependent on the talent and experience of the individual fund manager(s), as well as the timeliness of the fund strategy.
Challenges of hedge fund investing
Hedge funds are considered to be high-risk due to their aggressive investment strategies, combined with other inherent challenges of the asset class.
- Low liquidity: After making their initial investment, hedge fund investors are typically subject to a months- or even years-long lockup period. This arrangement frees fund managers from the obligation of providing liquidity to investors in the interest of taking on more aggressive investment positions, but makes it impossible for investors to redeem their capital on short notice if the need arises.
- Less regulated: Mutual funds are required to register with the Securities and Exchange Commission, but most hedge funds aren’t registered since they don’t advertise publicly. That means investors aren’t necessarily afforded the transparency needed to fully verify a fund’s claims about how their money is being invested.
Trends in hedge fund investing
Tech- & data-driven investing
Traditionally, hedge funds have been built around their fund manager(s), who were sometimes regarded as financial wizards. As technology has advanced, however, the use of investment tools built with advanced algorithms, machine learning, and artificial intelligence has gained more acceptance. Allocation decisions are no longer limited to the experience and instincts of a single person; rather, they are becoming more informed through hard data and analytics.
Environmental, Social, & Governance (ESG)
The ESG movement has touched just about every corner of the financial sector. Investors are becoming increasingly aware of both where their money is going and who is making those capital management decisions. ESG investments, as well as diversity, equity, and inclusion (DE&I) factors within the firms themselves, are becoming increasingly important competitive elements in the hedge fund space.
The 2008 financial crisis and post-COVID inflation have renewed broader public interest in market stability and consumer protection. In turn, hedge funds are increasingly abandoning the “2-and-20” industry standard fee structure. Instead, firms are adopting more transparent and competitive pricing models. Fund managers with successful track records can still command higher fees, but the industry average has fallen to around 1.4% in management fees and 16.4% for performance.
How hedge funds compare to franchise investing
While hedge fund and franchise investing are both ideal for investors who prefer a passive approach to portfolio management, hedge funds are much less accessible to the retail market. Even though the “2-and-20” model is losing popularity, the existing fee structure still takes a chunk out of hedge fund investors’ expected returns. In addition, hedge funds don’t advertise publicly and typically require a much higher initial capital outlay of $1 million or more. Most of these investment opportunities can only be found through personal or professional connections. Franchise investing, on the other hand, is readily available to the public and investors can start a portfolio for as little as $500.
FranShares brings actively managed portfolios to franchise investing
Until recently, franchising was a hands-on investment model. Investors had a choice between owning and operating directly or hiring a management firm to handle the daily operations of their business.
FranShares brings the passive power of private investing to the franchise model with an actively managed portfolio approach that lets individual investors add this valuable asset class to their asset mix without direct operation or location ownership.
Benefits of investing with FranShares
We combine deep industry expertise with a zero-fee approach to ensure our investors maximize their long-term returns – without the risk of losing their shirts. Our mission is to help investors reap the benefits of franchise investing with a unique business model that offers:
- Passive income
Our best-in-class franchise management team ensures that our investors enjoy truly passive income through quarterly distributions – without managing the franchise. In other words, we do the legwork while you sit back and enjoy the returns.
- Equity appreciation
The value of your franchise investment may increase over time and may provide secure, long-term passive income.
- Flexible capital commitment
We offer accredited and non-accredited investors the opportunity to invest for as little as $500, although our model also appeals to ultra-high-net-worth investors. Our platform allows everyday people to become fractional franchise owners with the ability to invest the right amount of capital for their own personal circumstances.
Diversify away from the stock market and other publicly traded assets while owning a portfolio of franchises across different geographies and industries, which creates an effective buffer against challenges that may shut down a single franchise or location, such as service franchises closing temporarily during pandemic lockdowns.
- Low volatility
Unlike other assets, which may experience considerable fluctuations due to investor sentiment, the growth in value and disbursements from franchise investments are determined over the longer term by the business operations of the franchises.
Ready to add franchise investing to your portfolio?
If you’re an investor who is looking to incorporate alternative assets into your strategy, investing fractionally with a FranShares franchise portfolio offers high earning potential and diversification in a completely passive model.
To learn more about FranShares and this unique opportunity, sign up for our platform on our home page.