Alternative investments may be utilized in various strategies and are complex products. Investing in complex products carries the potential for significant loss of principal and are not appropriate for all investors. These funds are considered speculative investments, therefore, investors should fully understand the terms, investment strategy and risk associated with these securities. The descriptions below are general overviews and you should always carefully review the offering documents associated with all specific investments you are considering.
Hedge Funds
Hedge funds are pooled investment vehicles with a limited number of qualified investors, which are operated by a professional manager. Hedge fund managers typically make extensive use of more complex trading, portfolio-construction and risk management techniques to improve performance, such as leverage, short-selling, arbitrage, hedging, derivatives, and other speculative investment practices that may increase investment loss. There are a wide variety of investment strategies deployed by hedge fund managers including but not limited to: long/short equity, global macro, relative value, managed futures and distressed. Hedge funds are typically structured as a limited partnership (LP) or a limited liability company (LLC).
Hedge funds can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, and often charge high fees that can erode performance. Additionally, they may involve complex tax structures and delays in distributing tax information. While hedge funds may appear similar to mutual funds, they are not necessarily subject to the same regulatory requirements as mutual funds.
Private Equity
Private equity investments are ownership or interest in an entity that is not publicly listed or traded. Qualified individual investors and institutions typically access private equity through investments in a private equity fund that raises capital from individuals and institutions to make investments in private companies. Private equity funds are typically structured as Partnerships where each investor is a Limited Partner (LP) and a professional manager acts as the General Partner (GP). Some of the most common private equity fund strategies include distressed, leveraged buyout, venture capital, private credit and real estate.
Illiquidity
Private equity investments typically are not liquid, limiting Client’s ability to withdraw their investment. Private equity funds usually do not have any redemption rights and are organized to have a limited life cycle, usually in the range of 7 to 15 years.
Expenses
Investors will receive offering documents detailing material information about the investment. These offering documents disclose the terms of the investment throughout the fund’s life, including the fees and expenses to be incurred by funds and their investors.
Conflicts
Private equity firms often have interests that are in conflict with the funds they manage and, by extension, the limited partners invested in the funds. Private equity firms may be managing multiple private equity funds as well as a number of portfolio companies. The funds typically pay the private equity firm for advisory services. In addition, the portfolio companies may also pay the private equity firm for services such as managing and monitoring the portfolio company. Affiliates of the private equity firm may also play a role as service providers to the funds or the portfolio companies. As fiduciaries, private equity firms when providing advisory services must make full disclosure of all conflicts of interest between themselves and the funds they manage in order to get informed consent.