The Legal Prerequisite
From a legal point of view, there is precisely one thing you need to do to be allowed to invest in hedge funds:
- As per SEC Regulation D, you need to qualify as an "accredited investor".
This is a legal requirement set up by the U.S. Securities and Exchange Commission, and hedge fund firms are legally required to check if you qualify before they can even give you access to the fund. This is in stark contrast to other entities such as mutual funds or exchange-traded funds (ETFs), which don't have the same requirement for joining but are much more strongly regulated by the SEC in terms of the actions they can take in a market environment. Essentially, having to qualify as an investor according to Regulation D is the price you pay for the greater freedoms of investment offered by hedge funds.
But don't worry, qualifying as an accredited investor doesn't require you to get a certificate from the Government or do a test – all you need to do is provide documentation proving you have the financial means or financial knowledge to make risky investments, having either:
- an annual income exceeding $200,000 ($300,000 if you're married),
- a net worth of more than $1,000,000 (ignoring the value of your primary residence), or
- a Series 7, 65, or 82 license (in good standing).
Once you meet any of these prerequisites, you are legally allowed to become an investor in the hedge fund of your choosing. Note, however, that you need to prove your status every time you apply with a hedge fund to become an investor. This also means that if your status changes over time, you may no longer be considered an accredited investor. For example, if you have an annual income of more than $200,000, you are considered to be accredited. If you get married at some point, and your combined income now doesn't exceed $300,000, you no longer qualify.
The SEC requires you to satisfy at least one of these prerequisites as a means to protect investors who may not have the knowledge and experience to avoid making bad investing decisions – or the financial means to recover from a lost investment. The SEC waives most of their regulations for hedge funds (such as the requirement to register with the commission) to give them more freedom to invest – but that comes at an increased risk which they believe only accredited investors should take.
How To Qualify For A Hedge Fund
Naturally, being an accredited investor is only the first hurdle to overcome on your way to becoming an investor in hedge funds. Accredited investor status only gives you the legal right to invest in these funds – finding one that's perfect for you and being accepted as an investor is another matter entirely.
First, you need to know that hedge funds are not open to the public. For some, this means that information about them is hard to come by, requiring you to do your research. For others, this also means they don't accept any new investors at all. Some of the most prominent funds have gone 30 years or more without accepting new investors.
Trying to gain access to a hedge fund – or even just finding out information about their strategies – is a daunting task. This is why CARL has made qualifying for a hedge fund as easy as pie. All you need to do is:
- Create a CARL account.
- Prove your accredited investor status.
- Link your CARL account to your bank account.
Once that's done, you gain access to all of our sophisticated quant funds. CARL also provides you with important information such as annualized volatility or historical performance – information that most other hedge funds may never disclose until you've already become an investor.
Keep Minimum Investments In Mind
Yet another hurdle on your way to becoming a hedge fund investor are the minimum investments. These are minimum amounts of money you have to put in the fund in order to even be allowed to invest in it at all. These typically start around $100,000 and can reach millions of dollars for some of the most high-profile funds.
This gives you two challenges to overcome before you can become an investor:
- Even if your net worth is big enough for you to qualify as an accredited investor, you may not have enough liquid cash to meet the minimum investment requirement.
- If you can meet the minimum investment requirement, this still means that you'll have to invest a large amount of money which will turn illiquid for a significant amount of time due to the sometimes long lock-up periods.
CARL also lowers these hurdles for you, requiring a minimum investment of only $20,000 for any of the quants in our portfolio. In addition, CARL's quants have no lock-up periods, allowing you to withdraw your money on a monthly basis. This means your investments will remain highly liquid, allowing you to end your commitment if, for example, you find yourself in sudden need of cash.
Consider the fee structure
Once you're an investor, you should also keep in mind that hedge funds charge you fees for their services. Firms have hedge fund managers, traders, and back-office employees to pay, while quants need money for programmers and cutting-edge technologies for their algorithms.
This is why hedge fund managers typically charge an annual management fee of 2 % of all assets under management as well as a 20 % performance fee on the profits from a particularly successful investment (this fee is only applicable if the profits from the investment exceed the hurdle rate as defined in the fund's prospectus). If you want to stay in the game, you should set aside a portion of your money to pay for these regular fees. Also, keep in mind that while "2 and 20" is the most common fee structure, your chosen funds are free to define their own fee structures.
Risk And Reward – Can Hedge Funds Make You Rich?
Hedge funds offer some of the best performance and some of the greatest returns of any investment vehicle. If you're looking for a way to prevent your hard-earned money from losing value due to inflation, hedge funds are a great way to do it. And if you're looking to grow your wealth beyond that, they can be the quickest way to that end.
However, you need to be aware that these funds are still investments and, as such, are subject to risk. Even quants, which use sophisticated machine learning algorithms and detailed market modeling to predict market development and make investment decisions, may not be able to make the right decision every time. In short: If you want to get rich with hedge funds, it's still up to you to make the best decisions for your financial situation.
Do you take the risk of investing in an aggressive fund that uses barely any hedging strategies to manage risk? Or do you take it slowly with a fund that aims to have net-zero market exposure, even if this means limiting the gains you might see within the first year or two? The decision is up to you.
Do Hedge Funds Invest In Private Equity Or Startups?
Hedge funds are legally allowed to invest in almost any asset or asset class. This includes startups and private equity, though not all funds add these to their portfolio. With CARL, you can check which assets or asset classes your funds invest in, giving you a clear picture of what to expect from each of them.
Become A Hedge Fund Investor With CARL's Strategies
CARL offers unprecedented access to some of the most sophisticated quantitative investment strategies, including valuable information about the performance and strategies of your chosen quants. Whether you're a private investor or an institutional investor, CARL is the most convenient way to benefit from the power of quants. With only $20,000 minimum investment and no lock-up periods, it's easy to get into the game – even for everyday people looking for a slice of the pie that had previously only been available to the uber-rich.