Common Risks Faced by Hedge Fund Managers
Operating a hedge fund comes with a lot of risk by nature of the type of investing the firm does. Hedge fund insurance can help the business mitigate some of that high risk with the right policies. The majority of hedge fund investors are from institutions such as pension funds. The risks facing hedge fund managers are the same regardless of who is investing in their fund.
Lack of Oversight
Since the Securities and Exchange Commission currently doesn’t regulate hedge funds, the earnings of the firm are not reported. Additional risk is taken on due to the lack of oversight. Even ok investments could cause the firm to go bankrupt.
Since hedge fund managers receive a percentage of the fund’s returns, the managers are more tolerant of risk. If the fund loses money, the manager owes zero dollars despite the amount lost. The investor may find the fund too risky for them and pull out.
High risk means high reward, but it can also mean greater loss. Derivatives are risky, but if timed right, can offer a big award. Timing the perfect investment window is tricky if not impossible. Even long-term trends cannot account for unexpected economic events.
An effective hedge fund insurance policy can help the firm control some of their risks. Investing is risky, but running a business doesn’t have to be.