You’ve heard about them; they’re risky. Few seem to make money for their investors. But they get a lot of attention when they do. So wouldn’t it be interesting to know where hedge fund managers invest their money? You might be surprised at the answer. Hedge funds are investment partnerships that employ a fund manager seeking to maximize investor returns, usually through aggressive investing strategies. Aiming for market-beating returns, these investment vehicles often invoke high-risk, complex strategies.
The “hedge” part of their name comes from their practice of using financial vehicles designed to produce a return if the market moves in a direction counter to their primary strategy, thus offering a hedge against potential losses. For example, a fund may hold a short position that can generate a return when an underlying investment instrument drops in value.1
With greater liquidity and less regulatory oversight than publicly-available investments (like mutual funds), hedge funds are laboratories for cutting edge investing strategies, and so compete to attract the brightest talent.
For seven years, Chelsea Brennan worked her way up the Wall Street ladder, eventually landing the coveted role of manager of a $1.3 billion hedge fund portfolio.
In a piece for Business Insider she explains that, while institutional and personal investing are quite different, her experience with the former taught her five basic principles about saving for retirement.
1. Understand your goals.
What is your desired endpoint? When you know where you stand financially today, what your next steps are, and what your ultimate goal is, you’re in a better position to evaluate opportunities more wisely.
2. Index, or structured funds, are an easy win.
They’re diverse, affordable, and most likely to see long-term returns. Brennan says that most of her colleagues who picked stocks for a living held the bulk of their personal savings in mutual funds.
3. Be in it for the long term.
Switching strategies at the drop of a hat, even if you stay invested, not only adds cost, but makes it more likely that you’ll suffer losses as you try to time the market.
4. Get help.
Brennan says that many people have the intellectual capacity to manage their own investments. But having the desire and emotional control to do it effectively and successfully is another story. For these two reasons some of the most brilliant fund managers she knows have financial advisors to help guide them through planning for their personal money.
5. Be prepared for anything.
This advice applies both in the market and in life. We can’t see the future but we can be pretty sure it’s going to bring challenges. It makes sense then to have a plan that takes into account the possibilities of setbacks in investing, in health, and in other areas of life. Because of this, Brennan recommends staying diligent about having your personal and financial affairs in order.
In short, you don’t have to be a brilliant Wall Street fund analyst to follow the basic principles of investing like one. If your situation needs review in any of these key areas, be sure to call us for a review. We can help hedge the risks of retirement income planning.
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