Alternative Investments; Part 3: Categories of Alternative Investments (Part 2)

Welcome to a new week!

Last week, we discussed Real Estate as a form of alternative investments. If you are yet to read that article, you should get right on it.

This week, we shall be discussing the following forms of alternative investments.

Mutual Fund:  In mutual funds investing, there is no high minimum investment requirement. A small capital can be utilized whilst the investor gradually builds their wealth.

In mutual funding, the investing public comes together in a group pulling financial resources to form in a singular investor, solely for the purpose of creating a well-diversified and optimally diversified portfolio for optimal financial return.  This mutual fund is managed by seasoned professionals who make decisions on how to optimally diversify the joint funds such that it yields a great deal of return for all investors.

Investing in a mutual fund is very similar to buying company shares however, there are distinctive differences such as the former being an investment portfolio and the latter being an actual company.  Like stocks, mutual funds are sold in units to investors with the entire value of the fund being the Net Asset Value (NAV) of its portfolio but investors have no voting right in the investment portfolio. A single share in a mutual fund is a piece of the portfolio managed.  Rather than getting a dividend on the unit of shares held by investors, mutual funds pay a ‘distribution’ at the end of the year. 

If you are considering investing in mutual funds, we advise you pay attention to the objective of the fund as this greatly determines the kind of portfolio the fund is used to build.

Hedge Funds:  A hedge fund is a pool of funds by individuals characterized by a high minimum investment requirement.  In some countries, they are limited to only accredited investors.  The activities of a hedge fund are high risk hence, it is suitable for investors with a high risk appetite.

Hedge funds are based on the concept of “Hedging” which is a risk management strategy hence, the goal of a hedge fund is to maximize return and minimize risk.

Hedge funds are similar to mutual funds with a distinct difference being that the ranges of investments in hedge funds are more diverse and high risk than those made in mutual funds. Due to the higher risk level, hedge funds tend to have higher returns but also could have a ghastlier impact in losses in line with the Finance Rule of ‘the higher the risk, the higher the return’.

Some of investments included in the hedge funds’ investment portfolio asides stocks and bonds are currency trading, bonds trading, real estate and so on. In Nigeria, however, hedge funds are not closely regulated unlike countries like the United States of America. This further increases the risk involved in making this type of investment. 

References:

Economic Times. (n.d.). What is Hedge Fund? Definition of Hedge Fund, Hedge Fund Meaning. The Economic Times. Retrieved February 22, 2021, from https://economictimes.indiatimes.com/definition/hedge-fund

Gad, S., & Scott, G. (2021, January 28). What Are Hedge Funds? Investopedia. https://www.investopedia.com/articles/investing/102113/what-are-hedge-funds.asp

Hayes, A., & Boyle, M. J. (2020, October 3). Mutual Fund Definition. Investopedia. https://www.investopedia.com/terms/m/mutualfund.asp#:%7E:text=A%20mutual%20fund%20is%20a,market%20instruments%2C%20and%20other%20assets.&text=A%20mutual%20fund’s%20portfolio%20is,objectives%20stated%20in%20its%20prospectus.

Hedge Funds in Nigeria – Meaning and How They Work. (2020, August 2). InvestSmall. https://www.investsmall.co/hedge-funds-in-nigeria/

Sraders, A. (2019, November 28). What Is a Hedge Fund and How Do They Work? TheStreet. https://www.thestreet.com/personal-finance/what-is-a-hedge-fund-14662109

Tretina, K. (2020, December 16). How Do You Invest In Hedge Funds? Forbes. https://www.forbes.com/advisor/investing/how-to-invest-in-hedge-funds/

U.S. Securities and Exchange Commission. (n.d.). Mutual Funds | Investor.gov. Investor.Gov. Retrieved February 22, 2020, from https://www.investor.gov/introduction-investing/investing-basics/investment-products/mutual-funds-and-exchange-traded-1

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