What is a Hedge Fund?

Hedge funds can be a diversification tool for some investors, but you should understand the risks associated with them.

Considering adding hedge funds to a portfolio?

You may wish you could diversify your portfolio beyond the typical stocks, bonds, and cash alternatives asset classes – especially when there’s market volatility. If you meet the qualifications to invest, you may want to consider adding hedge funds to the mix.

  • Hedge funds are private investment pools exempt from registration under federal securities laws because, among other things, they limit investors to those who are considered to be financially sophisticated.
  • They can be an important diversification tool for some investors and may complement an existing portfolio of stocks, bonds, or other securities.
  • Hedge funds have a wide range of investment flexibility and can employ investment techniques and investment strategies that often aren’t available to traditional investments.
  • They can help manage risk and may provide some downside protection.
  • Hedge funds consist of portfolios of underlying securities and can use a variety of investment strategies, from conservative to aggressive.
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Hedge funds are an alternative investment vehicle that are not suitable for all investors. Any offer to purchase or sell a specific hedge fund will be made by the product’s official offering documents. Investors could lose all or a substantial amount investing in hedge funds. They are open to qualified investors only and carry high costs, substantial risks, and may be highly volatile. There is often limited (or even non-existent) liquidity and a lack of transparency regarding the underlying assets. They do not represent a complete investment program. There is no secondary market for the investor’s interest in a hedge fund and there is no guarantee one will develop. In addition, there may be restrictions on transferring interests in a hedge fund.

Hedge funds trade in diverse complex strategies that are affected in different ways and at different times by changing market conditions. Hedge strategies are speculative and involve a high degree of risk which may expose an investor to additional risks. Their performance can be volatile and they may, at times, be out of market favor for considerable periods which can result in adverse consequences for the fund.

Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors, and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

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