- November 11, 2014
- Posted by: John Fischer
- Category: Accredited Investors
Hedge funds and other types of investment products can give people the opportunity to earn significant returns on their money while giving businesses the capital that they need to succeed. There are, however, several rules and regulations that fund managers must follow. Failing to do so could result in serious penalties from the Securities and Exchange Commission (SEC).
Hedge funds first appeared during the 1920s, while the United States was taking a very aggressive approach to the stock market. Warren Buffett has stated that one of the earliest hedge funds appeared in the mid-1920s. He cites an investment vehicle managed by Benjamin Graham as one of the first hedge funds. Considering that Warren Buffett is one of the world’s most successful investors, it seems wise to trust his understanding of the market’s history.
Buffet even says that similar ventures started during the 1930s had a significant influence on him when he started his first investment partnership in 1956.
People interested in becoming financial investors, or those who want to eventually become fund managers, should know some basic information about how SEC regulations affect the industry. A lot has changed in the industry, but many of the fundamental structures used to create investment funds are still popular today.
Finding Accredited and Qualified Clients for Hedge Funds
Hedge funds and investment brokerages can use a variety of techniques to find investors. According to Forbes contributor Russ Alan Prince, hedge fund, private equity, and other types of investment firms can now advertise their products and services. They can even advertise on TV. Unfortunately, attracting hedge fund investors isn’t as easy as airing an ad and waiting for people to call.
Fund managers who advertise their services have to pick through responses to find clients they can actually use. Fund managers cannot accept money from just anyone. Clients have to meet some qualifications to make sure they have a basic grasp of investment terms and they have enough money to recover from potential losses.
According to the SEC, accredited investors must either:
- Have a net worth over $1 million (this does not include the value of the investor’s primary residence)
- Earn at least $200,000 in annual income (combined income from spouses must equal at least $300,000 per year)
That means hedge fund managers who advertise may end up turning away the majority of people who respond to their ads.
Fund managers who want to attract accredited investors and qualified investors may want to use different strategies. If a fund becomes successful enough, its performance may do enough advertising to attract plenty of qualified hedge fund investors. Business Insider, for instance, frequently publishes information about successful hedge funds. Articles often include lists of highly successful funds. They also include information about management strategy, how much the hedge fund is worth, the year to date total return on investments, and the previous year’s return.
When a financial investor sees this kind of list, they may reach out to learn more about putting some of their own money into the fund.
Lead generation is another useful tool for attracting qualified financial investors. Lead generation can occur in a variety of ways. A hedge fund manager may arrange to speak with employees at a prominent business, or they may set up investment workshops where people can learn more about available strategies. During these events, managers can get contact information from people who are qualified to invest. It requires quite a bit of work, but it could have a more positive effect than advertising to the masses only to spend time turning most of them away.
It’s crucial for hedge fund, private placement, and other investment managers to recognize that they may only have the opportunity to accept clients who fit the definition of an accredited investor or a qualified investor. Many fund managers will want to focus on qualified managers because the SEC lets financial advisors charge performance rates that can reach as high as 40%. Managers can only charge accredited investors a management fee. This means they usually make the most money by attracting qualified investors to their agencies.
Using Hedge Funds as Accredited Investors
Hedge funds have a lot of flexibility that lets them invest in a wide range of opportunities. They can even qualify as accredited investors. Most successful hedge funds have more than enough money to purchase securities from companies that need more investment capital. In fact, few people can match the buying power of a hedge fund.
Qualifying as an accredited investor requires that the hedge fund have a competent manager who understands the industry’s risks. Since it’s so unlikely that anyone would start a hedge fund without significant experience, the vast majority of funds qualify.
Hedge fund companies can also structure themselves as limited liability corporations to invest as accredited investors. Since several types of organizations can qualify as accredited investors, hedge fund managers have a range of options that can help them invest in securities as well as stocks.
Financial investors interested in products like hedge funds and private placements have a growing number of options that they can choose. According to CNBC writer Lawrence Delevinge, there were more than 4,500 firms offering hedge funds and similar investment products in 2013. Together, they managed about $2.66 trillion in assets. Traditional hedge funds made up the vast majority (83.8%) of these products. Traditional hedge funds alone controlled over $1 billion in assets in 2013.
Investors who can qualify to put their money in hedge funds should consider the option seriously. Not all hedge funds generate larger returns than the stock market, but those that do tend to outperform typical stocks by a wide margin. While Bloomberg writer Kelly Bit notes that hedge funds returned an average of 7.4% by the end of 2013, Business Insider’s list of top hedge funds show that the most success can provide year to date total returns that are over 20%. That means qualified people should choose their options wisely so they make more money from their investments.