The majority of otherwise accredited individual and small to mid size institutional investors (public and private pensions, trusts, endowments and foundations) do not invest in hedge funds for a variety of reason including:
- It is difficult to learn about hedge funds since hedge fund marketing efforts are sharply limited by financial industry regulations. Unlike mutual funds hedge funds advertising and promotional efforts are restricted. To learn about hedge fund takes real effort. Many individual and smaller institutional investors lack the time and resources to seriously develop an understanding of the hedge fund industry. Instead they often rely on financial advisors including planners and accountants.
- Motivated potential hedge fund investors can learn about the industry by attending industry conferences, visiting relevant industry web sites such as www.eureka.com and www.barclays.com and subscribing to various industry research and tracking services.
- Often financial advisors have limited knowledge of the hedge fund industry since they lack a large enough client base interested in hedge fund investing to justify the steep learning curve.
- Financial advisors working with a broker–dealer organization, including most of the major Wall Street firms, are restricted in terms of what they can recommend to their clients. They can only recommend investing products developed or approved by the broker-dealer. Some Wall Street firms have developed their own hedge funds which they encourage their advisors to recommend to clients. Since the best hedge funds have adequate access to accredited investors they do not need or solicit distribution by broker-dealers. The Eagle Rock Diversified Fund invests only in independently owned and managed hedge funds rather than ones developed by a Wall Street firm.
- The Press is generally not kind with their coverage of the hedge fund industry. In the majority of cases the PressÂ’ coverage of the industry focuses on significant blow-ups. The top hedge funds neither need nor try to get press coverage so they fly below most investors’ radars. Their investors are sophisticated and have the time and resources to study the hedge fund industry, identify possible funds for their investments and conduct the required level of due diligence.
- The majority of the better hedge funds are not receptive to bringing in individual or smaller scale institutional investors since they are limited in the number of investors they can admit into the fund. Based on industry regulation there are two types of hedge funds. One type can accommodate up to 100 investors. The other can accommodate up to 500 investors. With a limit on the number of investors allowed into a hedge fund the preference will almost always go to larger investor.
- Investing terms can be a barrier for many individual and smaller institutional investors. Because hedge funds can accommodate only a limited number of investors they set high minimum investment requirements that typically start at $1 million or higher. Hedge funds have “lock-up” requirements that investors have to accept that limit the liquidity of their investments. Most hedge funds have a “lock-up” period of a year or longer for each investment. Investing terms can be a barrier for many individual and smaller institutional investors.
- Hedge fund investors generally incur higher management fees than they incur with other investment vehicles such as mutual funds. Hedge fund managers typically charge an annual management fee of from 1% to 2% of assets under management and receive a year-end performance fee that typically equals 20% of the investors net gain for the year. Losses in any given year have to be recouped before the fund manager received a future performance fee.
When selecting hedge funds for its portfolio the Eagle Rock Diversified Fund’s focus is on the net performance generated for investors by the fund rather than on the fees collected by the fund’s management team.