DUBAI, UNITED ARAB EMIRATES--(Marketwired - May 17, 2016) - Seasoned stock traders can blanch at the prospect of entering the hedge fund arena, yet they are an important component of a diversified investment portfolio. Reda Bedjaoui, CEO of Redbed Investments LLE and an expert in commodities trading, offers concrete insights that reassure novice hedge fund investors and advises them to conduct due diligence on the contenders. The first step is to collect pitch books, which outline key personnel, portfolio details, and investment strategies. While funds don't reveal specifics, they will likely follow one of three types of strategies: arbitrage, event-driven, or tactical. "Arbitrage relies on utilizing derivatives, a variety of exchanges, and other methods to extract profits from inefficiencies in the market," Bedjaoui explains. "Event-driven strategies leverage occurrences like mergers and acquisitions, utilize ownership positions to restructure companies, or flip profits from distressed securities." Hedge funds can employ diverse tactical strategies, but may specialize in short sales, focus on industry-specific stocks, or combine long and short strategies for stocks and futures.
Reda Bedjaoui suggests that would-be investors look for high-performing managers who utilize sustainable strategies. "This avoids the headline-generating implosions that occur when investors chase the bottom line without questioning the behind-the-scenes methods for generating profits," he notes. "Look for an investment methodology with an acceptable level of risk." Once an investor has winnowed down the choices, the next step is to examine the hedge funds' legal documents. Novice investors are encouraged to pay close attention to the description of allowable investment vehicles. "Some hedge funds have narrow parameters, while others build in flexibility for the hedge fund manager," Bedjaoui notes. "More flexibility means the potential for greater returns, but it also translates to increased risk."
According to Reda Bedjaoui, potential investors should also carefully review the documents that outline terms of investment, including information about whether the fund has one or multiple share classes, minimum investments, withdrawal terms, and fees. While both management fees and incentive fees are typical, funds can vary regarding when incentive fees apply. Prior to investing, it is critical to speak with the hedge fund manager, analysts, and operations personnel. It is also appropriate to talk to current or past investors who can provide references for the hedge fund manager. Bedjaoui observes that, although the vetting process can seem daunting, "With the proper roadmap, even novice investors can enjoy evaluating hedge funds, diversifying their portfolios, and reaping the resulting rewards."