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Hedge funds

More complex and risky than other managed funds

Page reading time: 5 minutes

Hedge funds use investment strategies that are more complex than other managed funds. Many aim for positive or less volatile returns, in both rising and falling markets.

A hedge fund is a complex investment and risks vary. Read the product disclosure statement and consider getting financial advice before you invest.

How hedge funds work

Hedge funds ('absolute return' funds) use pooled funds to invest in alternative assets or strategies. This may include the use of derivatives, alternative investments or leverage in domestic and international markets.

Hedge fund returns may depend less on traditional assets, like shares and bonds. This can make it a good way to diversify a portfolio.

A hedge fund may aim to deliver positive or less volatile returns, in both rising and falling markets. It could try to outperform a benchmark, such as a market index or interest rate. Or achieve a benchmark return with less volatility.

Hedge fund features

There are different types of hedge funds. The features and risks of each depend on:

See the fund's product disclosure statement (PDS).

Investment tools

Common investment tools include:

Fund of hedge funds

A 'fund of hedge funds' is a fund that invests in other hedge funds. It may invest all or some money in other hedge funds.

When a fund invests in another hedge fund, the underlying fund is usually not open to retail investors. The underlying fund may be offshore, with less monitoring.

A fund of hedge funds may have extra risks. For example, it may invest in multiple hedge funds, across assets and markets. This can make it harder to know where the fund invests your money, and what the risks are. You may also have to pay more fees.

Pros and cons of hedge funds

To decide if investing in hedge funds is right for you, consider the following:



What to check before you invest in a hedge fund

Read the product disclosure statement

Hedge funds vary in risk and complexity. The fund manager will give you a PDS before you invest. This sets out the features, benefits, costs and risks of the fund. Make sure you understand the investment before you go ahead.

Check your understanding of the fund

Use these questions to check your understanding of the fund:

Get advice if you need it

Talk to a financial adviser if you need help deciding if this investment is right for you.