Think Hedge Funds Are Super Secret? They’re Often Not — and You Can Invest in Many of the Same Stocks.

Many people correctly associate hedge funds with rich people and may wish they could invest in them, too, despite not being rich. If you’re interested in investing in them, there are some solid reasons not to do so.

At the same time, there ways you can invest like hedge funds if that is your aim. Hedge funds aren’t quite as secretive as you might think, either. You can find out what they’re buying and selling.

What are hedge funds?

A hedge fund has a lot in common with a standard actively managed mutual fund. Like a typical mutual fund, it pools the money of investors, and its managers decide how to invest that money. Here are some more things to know about hedge funds:

• Typically, only accredited investors can invest in hedge funds. These are people whose annual incomes have been at least $200,000 (or $300,000 for married couples) for the past two years and are expected to continue earning at that level. They also must have a net worth of at least $1 million (excluding the value of their primary residences) and/or have earned certain financial services licenses.

• Hedge funds tend to charge significantly higher fees than mutual funds. A classic hedge fund fee structure is referred to as “2 and 20” — meaning that the fund charges 2% of your account’s value each year and also takes 20% of all profits or 20% of profits exceeding a defined “hurdle rate.”

• Investments in hedge funds are often locked up for the first year, with investors unable to sell shares. After that, they may only be able to sell during certain periods.

• Hedge funds often invest in a more risky manner than traditional mutual funds. They may, for example, employ a lot of leverage (i.e. investing with borrowed money) and invest in options, futures, and derivatives.

Top hedge funds

Here are the biggest hedge funds in the U.S. as of July, per Forbes.com:

Source: Forbes.com.

Should you invest in hedge funds?

If you don’t qualify to invest in hedge funds, don’t worry too much. They don’t necessarily perform that well. For example, in the first half of 2024, hedge funds gained 5% — well below the S&P 500‘s 15% jump — per data from HFR.

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Some funds have imploded, like the Long-Term Capital Management fund, which attracted billions of investor dollars in the 1990s before a lot of leverage and investments in Russian bonds that defaulted led to its ruin. Others have simply underperformed. Bridgewater Associates, for example, used a “risk-parity” strategy in its “All Weather” fund that significantly underperformed a portfolio with a simple 60-40 stock/bond mix over a decade.

Even if you’re in a fund that performs well, you’ll be paying a lot in fees. Imagine having $100,000 in a classic hedge fund with a 2-and-20 fee schedule. If it loses 10% in one year, you’ll be down to $90,000 and still be paying that annual 2% fee of around $2,000. If the fund gains 20%, it will reach $120,000, but you’ll be paying around $2,000 or more via that 2% fee — plus 20% of that $20,000 gain — which is another $4,000.

What are hedge funds investing in?

Hedge funds are somewhat secretive, expecting investors to trust that the funds’ professional money managers will deliver great results. But large funds are required to report on their holdings quarterly — and small investors can see what the funds have been up to by reviewing those “13F” reports.

Head to WhaleWisdom.com, for example, and type in a hedge fund’s name, and you’ll be able to access their 13Fs, which can tell you about new buys, new sells, top holdings, and more. If you do so, you might start to notice that many hedge funds have much of their assets in very popular stocks — including the “Magnificent Seven.”

Below, from VirtualCapitalist.com, are the recent top holdings of hedge funds, featuring the seven (less Tesla), plus some others:

Source: VirtualCapitalist.com.

You can invest in those stocks individually yourself or via a tech-heavy exchange-traded fund (ETF). Many such funds charge 0.35% or less per year without taking a percentage of profits. (Here are seven to consider.)

Don’t worry about missing out on hedge funds. Sure, some do quite well for their investors, but others don’t. A simple low-fee index fund, such as one that tracks the S&P 500, can be all you need to amass a hefty war chest for retirement.

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Think Hedge Funds Are Super Secret? They’re Often Not — and You Can Invest in Many of the Same Stocks. was originally published by The Motley Fool