A Beginner’s Guide To Investing In Hedge Funds

Hedge funds are one of the best ways to invest for wealthy investors. Risk management firms like Alternativesoft can help you speculate the risks involved in certain investments but there will always be imminent and incomprehensible risks to all investments. 

What Is A Hedge Fund?

Hedge funds are directed by financial organisations that acquire the services of hedge fund managers to assist in the process of managing complex investment tactics. Fund managers have the responsibility to pick and choose to invest in any asset that will reap a profit according to their discretion. Their goal is not to evaluate their earnings in comparison to an index, rather to find any means to make profitable returns based on current stock market trends. A hedge fund manager is single-handedly entrusted to invest in any investment, bonds, shares, futures, or other predefined investment ventures for a certain depositor. 

How Do Hedge Funds Work?

Hedge funds are operated by hedge fund managers and no two hedge fund managers have the same strategy to earn profits. But there are some similar characteristics of all hedge funds:

  • Investors rely on the services of a hedge fund manager to make sound judgments on their behalf. But there are no specific guarantees of profitable performance, even if the selected hedge fund specialises only in a certain type of investment. 
  • Generally, hedge fund managers fees depend on the manager’s performance fee, and yearly charges according to the worth of the hedge fund. 
  • Hedge fund managers make use of derivatives, or financial tools, to facilitate the decision-making process. 
  • Hedge funds can focus on any particular asset based on the fund manager’s discretion to secure profits.

Hedge funds target accomplished investors as opposed to the public at large. They only consent to affluent, professional investors who have no qualms to take substantial risks and pay high fees without hesitation. If you are sceptical about any of your transactions, it is recommended to seek impartial financial guidance. 

Who Regulates Hedge Funds In The UK & USA?

Dubbed as the “1%ers” in the world of investment, the Alternative Investment Fund Managers Directive (AIFMD) regulates hedge funds in the UK. This means that hedge fund managers must be straightforward in their transactions and there are rigorous sets of regulations that hedge fund managers must follow. 


Hedge fund managers must comply with the UK’s laws and regulations associated with market abuse and insider dealing. The two main origins of regulation and law are:

  1. The Criminal Justice Act 1993, a UK law that enforces criminal sanctions on insider dealings
  2. Market Abuse Regulation (EU) 596/2014 an EU regulation that enforces civil sanctions on market abuse


The UK is more stringent in governing and applying regulations to hedge funds in comparison to the US. The Securities and Exchange Commissions (SEC) is looking into standardising hedge fund investments due to prospective infringements such as access to privileged information and double-dealing. 


Hedge funds can develop exclusive offers for potential clients with the help of Jumpstart Our Business Startups Act (JOBS Act), in the US. Currently, they only accept offers from authorized investors. Hedge funds are important for small businesses and startups because they provide investment opportunities to a broad spectrum of affluent investors. 

What Are The Main Features Of Hedge Funds?

A hedge fund has some of the following features:

  1. Available only for restricted or authorized investors: Affluent investors must be earning an income of at least $200,000 annually for at least two years to qualify as an investor. Their overall net worth should be more than $1,000,000. Such an investor can deal with the possible risks to their contribution.
  2. Presents a broader investment opportunity in comparison to traditional funds: The hedge fund manager can include a diverse range of financial transactions to earn a profit only restricted by the hedge fund manager’s imagination. These transactions can include making investments in stocks, real estate, currencies, derivatives, and even fine art. 
  3. Access to purchasing power: Hedge funds can make use of large amounts of temporarily acquired funds to multiply potential returns. 
  4. Schedule of charges: Hedge fund managers bill for their performance fee and the expense ratio in addition to their commission. Customarily charges follow the “two and twenty” rule, which means that the management gets 2% and the hedge fund manager gets 20% of the profits generated by the total investment. 
  5. Exclusive investment opportunities: No two hedge funds are the same because each hedge fund is the product of the efforts of different hedge fund managers. Hedge fund managers can choose to invest in any asset utilizing their expertise and knowledge of the market provided that they divulge the investment proposal. 

Hedge Funds & Taxes

Organizations that provide hedge fund investment opportunities in the UK often register themselves as offshore companies or partnerships for tax purposes. Partnerships are based in Bermuda, Cayman or Jersey and are “tax transparent” in their host country. These countries are chosen because most of these countries either allow full profit exemption or impose a low level of tax. This is why it is in the best interest of the investors and hedge fund managers to register their organization as an offshore partnership or company. 


Investors will be taxed on their share of the percentage profit they receive due to holding the investment. A UK investor is responsible to pay taxes on all of the income, which is reported and distributed to them, generated by the hedge fund. According to UK bond fund rules disbursements made to UK investors from investment funds invested in more than 60% in investments accrued over a period of time will be considered as interest, that can be taxed. 

How To Select A Hedge Fund

To successfully select a profitable hedge fund make sure you understand the risks and the strategies the hedge fund manager employs. Determine the metrics which you consider crucial as well as the specific expected gains for each metric. This entails investigating the hedge fund’s previous year’s gains in addition and its current ranking within its specific investment category. If you are looking for guaranteed returns and do not want to risk your investment then consider investing in a savings account with a fixed rate bond.