Hedge Fund Investing how the Rich get Wealthier

How does the rich stay rich when they get rich?

This question of how the rich stays rich once they get rich has been asked too many times, but the answers are not too obvious. One thing we know for sure is that wealthy individuals also continue to invest their assets into other income yielding ventures. This article will however discuss one of those income yielding investment vehicles known to have helped the wealthy shield their assets during the time of high volatility in the global stock markets.

During the late 1990s, the stock market went into a tail spin following the collapse of the dot coms, and the global technology sector. Traditional investor’s confidence was shaken when the technology sector collapsed; huge amount of capital went down the drain in the process, and many traditional investors shifted away from the historical “buy and hold strategy” in favor of hedge funds. What are Hedge funds one may ask?

Hedge Funds are investment asset class similar to Mutual funds. However they differ from mutual funds because they are not regulated by the Securities and Exchange Commission [SEC]. As a result of that, hedge funds can apply some unconventional trading techniques, which are not available to mutual fund managers. An example of such unconventional trading tactics is “Short-Selling”. The U.S. Securities and Exchange Commission prevent mutual fund managers from using “Short selling” strategies. As a consequence, mutual funds lost significant assets during the recent market crash.

Hedge Funds were able to profit from the declining markets during the recent stock market crash of the late 1990’s and early 2000’s. By using “Short-Selling” techniques of selling securities like stocks short, the average hedge fund recorded significant profits when the markets declined. Hedge funds also use a combination of other strategies such Global macro strategies, and Arbitrage techniques to gain from the global exchanges.

However, the catch here is that Hedge funds are not for all. You have to be rich or wealthy to be allowed to invest in them according to the U.S. Securities and Exchange Commission. How rich you may ask? In other to invest in hedge funds you must be qualified by the hedge fund companies, and you must have a net worth of $1 million. Once you meet such conditions you may join the club reserved for the rich. Each hedge fund is generally made up of no more than 99 investors according to SEC stipulations.

It turns out that most of the investors in hedge funds are rich people, in addition to institutional investors, including pension funds, university endowments, financial institutions and Insurance establishments. During the past 17 years according to data from VAN, a Hedge fund tracking firm, hedge fund investors have made a profit of about 17 percent on their investments every year. That means that a rich person who invested about 10 million dollars into hedge funds would have made a profit of $1.7 million every year for the past 17 years. Hedge funds have become so popular that millionaire investors are throwing their money into them from everywhere corner of the globe. Recently the U.S Securities and Exchange Commission under the former Chairman William Donaldson passed a law to restrict the activities of Hedge Funds. Many Republicans and Hedge Fund Industry participants opposed the proposal but the proposal passed anyway with the help of democrats.

The ramifications of the passage of the new U.S. laws to regulate the hedge fund industry has claimed some victims-Chairman William Donaldson has resigned as the Chairman of the Securities and Exchange Commission, and the law itself which will fully go into effect early next year is currently thrown into legal limbo when a New York based hedge fund manager challenged the law in a Federal court. Meanwhile in 2005, hedge fund returns have moderated, but industry analysts believe hedge funds are here to stay.