Scott Tominaga – The Basics of Hedge Funds for Small Investors

Scott Tominaga – The Basics of Hedge Funds for Small Investors

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Hedge funds are investment schemes that a group of accredited investors set up by accumulating their monetary resources. These are wealthy individuals whose net worth is more than one million dollars. Almost all of them earn an annual income which exceeds $2,00,000 for two consecutive years. Some of the investors may even hold equity in assets worth more than $5,00,000. They normally trade in liquid assets, real estates, currencies, and even land. In doing so, they adopt complex portfolio-construction and risk-management techniques. These could include the use of derivatives, an appropriate leverage, and even short-selling. The objective of the investors is to maximize the returns on their capital while minimizing their risks.

Scott Tominaga – How can small investors participate in hedge funds?

Scott Tominaga is a financial and investment expert from Carlsbad, California. He is a business finance graduate from Arizona State University with a wealth of experience exceeding 25 years. He specializes in accounting, brokerage, compliance, marketing, administration, and back-office operations. He has the distinction of being a FINRA regulator in the initial years of his career. Today, he holds the post of Chief Operating Officer in PartnersAdmin LLC. This is a popular finance service company with its headquarters in California dealing in fund investments.

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He explains many small investors may show a lot of interest in hedge funds. The investment schemes give them lucrative returns within a short time while minimizing their potential risks. However, the fund managers and other participants generally impose restrictions on their involvement. They do so in accordance with the guidelines which U.S. Securities Exchange Commission lays down. Even then, if investors still wish to invest, they need to meet the following two requirements:

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  • They must produce documents to prove their annual income for the last two years is more than $2,00,000, and
  • They should own assets whose net value exceeds one million dollars but does not include their primary homes.

He further clarifies small investors should also be aware of various hedge funds strategies besides fulfilling the necessary criteria. Only then can they determine whether it is worthwhile to invest in the investment scheme. Generally, the hedge fund managers resort to any one of the following popular four strategies to boost their clients’ returns:

  1. Distress investing which involves buying loans of companies on the verge of bankruptcy or capital reconstruction at deep discounts,
  2. Risk arbitrage where managers simultaneously purchase and sell off securities of two companies who are about to merge,
  3. Convertible arbitrage which involves buying all the convertible debts of a company but short-selling its stocks, and
  4. Global macro where managers invest in currencies, commodities, stock, and even bonds in other countries depending on their economic condition.

Scott Tominaga sums up by saying hedge funds may seem attractive to many small investors. The schemes can help them to increase their wealth over a short time with minimum risks. However, they should have an annual income of over $2,00,000 or a network of $1 million to participate in order to enjoy its benefits to the optimal extent.

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