When you are young and saving for retirement, you can afford to have a riskier portfolio than someone nearing retirement age. Investing in hedge funds could be part of your retirement portfolio, but they are different from regular investments. Unless you have big bucks to invest, usually more than $10,000 and sometimes more than $1 million, you would not be eligible. You might be able to get in on some hedge fund action, however, through mutual funds that act as hedge funds.
About Hedge Funds
Hedge funds were created in 1949 as a way to minimize risk using the same strategy you would use when hedging your bet. They used a long-short strategy that worked like this: You would buy a traditional stock that you think will rise. This is a long-term stock. You would sell short stocks that you predict will fall. Selling short requires you to borrow someone else’s stocks that you think will fall soon. If they do, you would buy them at the cheaper price, return them to the owner and keep the difference. But if they rise, you would be required to make up the difference to return them. Most hedge funds are not true hedges anymore. As of 2011, only 30 percent could be classified as such, according to Bob Frick, Senior Editor of Kiplinger's Personal Finance.
Hedge Fund Performance
Hedge funds make the financial news often because they are viewed as a high-roller, aggressive type of investing. That is partly true. Hedge funds have been known to pay in the double or even the triple digits. But taken as a whole, their performance has been only mediocre, according to Frick.
Hedge Fund Retirement Planning
Hedge funds use a variety of complicated strategies designed to beat the market, which could make them a useful part of your retirement portfolio. If you cannot afford to get into a true hedge fund, you might want to try a hedge-like mutual fund. These mutual funds follow the same sort of strategies that hedge funds do such as the long-short strategy. If you want to try this type of mutual fund, it is best to consult with a financial adviser, recommends Sheyna Steiner of Bankrate.com.
General Retirement Planning
A more traditional approach to retirement planning is to sign up at work for a 401(k) if your company offers it. If not, open an IRA. Barbara Whelehan of Bankrate.com suggests young people put 7 percent of their savings into a retirement vehicle and gradually increase this each year until you hit 15 percent. If you are not the type to continually adjust your investment, consider an investment product called a lifecycle fund that automatically adjusts your investments based on the year you will retire.
- Hemera Technologies/AbleStock.com/Getty Images