101-10 Hedge Funds & REIT’s

Hedge Funds

A hedge fund is designed for sophisticated investors or higher net worth individuals. As such, there are usually higher entry costs, such as a minimum investment of $50,000 or $100,000 to get started in a fund.

The funds are usually aggressively managed to ensure maximum returns that should, in theory, significantly beat the index against which they are benchmarked. Unlike mutual funds, they may not specify a particular asset or investment style that they wish to adhere to. This enables them to remain flexible and adopt any investing tactic that suits the current market conditions. At any given point, a hedge fund may be:

  • Long: betting the market or underlying assets will increase in value.
  • Short: betting the assets will decrease in value.
  • Highly Leveraged: meaning for every $1 they have in actual capital, they may borrow $10 to maximize their returns; this is 10X Leverage
  • Investing in currencies, property, commodities, stocks, ETF’s and other even more exotic instruments like credit default swaps (CDS) or collateralized debt obligations (CDO’s)
  • High-Frequency Trading: using computers to arbitrage deals at a very high frequency. For example. If gold sells at $1600 an ounce in the U.S. and $1590 an ounce in Australia, they may choose to buy in Australia and sell the gold in the U.S. for a $10 per ounce profit.

The hedge fund will usually see a 2 and 10 pricing structure as a reward for the aggressive investment strategies and higher returns. This means they will charge the investor a 2% annual charge on the entire investment they have made and keep 10% of the profits they have made with the investor’s money.

PODCAST – Hedge Funds and REITS – Are they as good as they seem?

A close look at Hedge Funds and Real Estate Investment Trusts

  • Published: Sun, 04 Mar 2018 23:00:00 GMT
  • Duration 00:10:09

Real Estate Investment Trusts (REITs)

A REIT trades directly on an exchange like an ETF, but its underlying assets are usually property-related. REITS may also take the form of a mutual fund if the fund is focused on property only.

As the name suggests, a Real Estate Investment Trust will invest directly in property or the underlying mortgages.

Key types of properties invested in include:

  • Commercial Property:  Office Blocks, Event Venues, Shopping Malls, Hotels, and Warehouses.
  • Residential Property: Land and Apartment Blocks

Property REITS seek to make profits from renting the property and by the increase in the value of the underlying asset. For example, a REIT may own a building on Wall Street. They may rent that property to several Financial Institutions, thus earning a regular income from the asset. They will also be able to realize any increase in the property’s value as profit.

Mortgage REITS invest in the mortgages that provide the capital for others to buy the property. They supply the capital to fund the mortgages and earn the percentage interest paid on the lease for the duration of the agreement. They may also purchase mortgage-backed securities.

Some REITS may combine both strategies; this is known as a hybrid REIT.

A vital advantage of a REIT is that it has unique Tax benefits. It offers the investor a method to profit from any increases in property value without investing in the property directly by taking out a mortgage and maintaining the property.

Summary

In this section, we examined ETF’s, ETN’s, mutual funds, hedge funds, and REITs. We also discussed the advantages and disadvantages of each. In the next section, we look at more advanced ways to invest, such as stock options and the futures market.

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