Making financial decisions is not confusing, but it can be intimidating, too. Often, you aren’t fully aware of how these investment strategies work, who they’re for, and even if they’re even right for you. To help shed some light into the world of hedge funds and REITs, we’re directly comparing them today.
Whether you’re curious about the different fees they take, how risky they are, or even how accessible each type of investment is, we have all the answers for you and more down below. Soon, you’ll know everything you need to make the best financial decisions for you.
What are Hedge Funds?
It’s crucial to understand exactly what hedge funds in order to know if they’re right for you. Essentially, hedge funds are groups of investors who pool their money into certain stocks, indexes, or companies for a huge profit.
The investors involved in managing and utilizing hedge funds are not your everyday investors, either. In order to invest in hedge funds, you have to have to prove that you’re fairly established in the world of financial investing. For more details on that, we’ll talk about accessibility later.
Hedge funds are tricky, as they offer such high-reward, but they’re also incredibly high-risk, too. While you can see quite substantial gains from funds such as these, some of the most devastating losses come from hedge fund investments, as well.
So, you have to truly consider whether or not you’re that much of a risk-taker. If you have the money to invest and the security in case it’s gone, hedge funds might be an ideal investment opportunity for you. But, if you’re someone on the bit more cautious side, ETFs or mutual funds might be the best route to take.
What are REITs?
On the whole other side of the spectrum, you can also choose to invest in Real Estate Investment Trust, or REIT. REITs, as you can probably guess, deal primarily with real estate endeavors.
Specifically, those who invest in REITs are going to have investments in “income-generating” real estate. So, instead of choosing to buy an entire apartment complex and run it yourself to get some profit, you can choose to invest in REITs of a similar building and get a share of the profits without ever even stepping foot in the building.
These styles of trusts are publicly traded, just like we see with stocks–and the total opposite of what we see with hedge funds.
Whether you’re interested in getting a share of profit from an apartment complex, hotel, office building, medical building, or even retail center, REITs are a great way of doing so. They’re not incredibly high-risk, and they still give you a good flow of income when you need it most.
Similarities and Differences
This is where things get a little bit tricky. While both hedge funds and REITs are two totally separate invest strategies, you can actually invest in REITs while investing in a hedge fund. REIT hedge funds are actually fairly common, and they work by investing in existing real estate companies or the acquisition of actual real estate properties themselves.
But, when we truly separate the two and analyze how they function, it is clear hedge funds and REITs are very different in structure.
Below, we’ve broken down the nitty-gritty distinctions between hedge funds’ fees, risks/rewards, and accessibility compared to what REITs have to offer. When seeing this, the two investments are drastically different–despite somehow being a part of one another.
All About Hedge Funds
Hedge funds are incredibly unique–yet incredibly complex–forms of investment that everybody deserves to know about. And, if you’re curious about starting your own hedge fund after reading about these, we can help you with that, too.
Unfortunately, hedge funds come with quite extensive fees. In general, hedge funds are run by private investors only, and they are not available to the public. Because of this, fees tend to fluctuate depending on who the investor is.
This can get frustrating for those looking for consistency and don’t want to deal with excess charges and taxation. Typically with hedge funds, you will encounter a 2% management fee, where the annual fee that goes to hedge fund for helping to manage assets. Then, you will also encounter a performance fee that usually falls around 20%. This fee is essentially the percentage of the profits made from hedge funds.
Again, because hedge funds are run by private investors, these investors can actually choose to fluctuate these fees. Some may offer lower management fees but higher performance fees in turn. So, you have to be prepared to give a good amount of your profit back to your hedge fund. If this is something that is financially viable for you, that’s great! If not, there are other options out there.
Hedge funds are considered among some of the riskiest investment opportunities out there. Because you and so many other investors are pooling your money collectively, there is a lot to lose (as well as a lot to gain).
Concentrated money strategies can prove devastating if the market goes in one direction, but could completely change your life if it goes in another. Hedge funds are extremely risky in this way, which is why they’re only interested in having the most experienced professionals involved.
Unlike traditional stocks, you cannot just buy and sell willy nilly. These funds are much more complicated and high-risk than that, posing a more complex situation overall. You have to partner with the right people and work with the right companies to get the most reward, but doing this requires years of experience, as well as a lot of trial and error.
Once again: if you have the money the risk, then this is a great route to go. However, hedge funds are typically extremely pricey, so you should only invest if you are financially stable enough for it. While there’s always the chance of high reward, high risk is all too prominent, too.
Hedge funds are not a part of the public sector. These are funds that are only accessible to private investors who have proved their worth.
These investors must demonstrate experience in the financial trading industry, as well as successfully working with hedge funds or similar investment strategies. Not anybody can just invest in a hedge fund: they’re only for the most elite investors out there.
As we mentioned above, these hedge funds come with extremely high risks. This is a big reason why the accessibility is so limited: only professionals should be dabbling in such a risky, tumultuous investment.
If these were available to the public, we would probably see a lot more money loss, and the entire market would be skewed. Hedge funds are not for the new or inexperienced, and they make that clear.
All About REITs
Real Estate Investment Trusts are a bit more straightforward than hedge funds, and definitely a lot less risky. For details on their potential fees, risks/rewards, and accessibility, scroll down below.
Similar to hedge funds, REITs can also create some hefty fees that you may not have been expecting. What most people don’t realize is that, with REITs, they have to pay back at least 90% of the profit it made to its shareholders. That leaves you only with a small chunk of change back in your pocket. Because of this, dealing with upfront fees can be costly.
It isn’t uncommon for REITs to charge upfront fees of 9 to 10%, though others have even seen numbers as high as 15%. On top of these substantial fees, you will also have to deal with external manager fees.
Once again, these fees can vary significantly depending on who the company is and your relationship. Manager or management fees refer to a percentage charged to the fund manager themselves. So, while these fees are necessary for the process, you need to weigh if they are worth it in the long run or not.
In general, REITs are considered to be somewhat low-risk. You don’t necessarily have to invest large sums of money, and real estate is something that tends to be a fairly stable market. (Well, most of the time, at least.) However, there are some shocking risks that do come from these specific types of trusts.
The biggest risk you’re going to face with these types of trusts is the interest rate. As interest rates rise, demand for REITs lower significantly, affecting their worth. If you can ride it out until interest rates lower again, that’s great, but this can typically greatly affect your entire real estate investment.
You’re also going to face the risk of investing in a REIT that simply shouldn’t be invested in. Certain types of poperies are known to be declining in popularity, making them unappealing for investors. You don’t want to get caught investing in an experimental warehouse that just isn’t going to go anywhere.
Opposite of hedge funds, REITs are completely available within the public sector. Anyone and everyone who wants to be a part of the world of real estate technology can with these trusts, making them much more accessible than hedge funds ever will be.
You can choose to invest in various different types of properties, and, as we mentioned, these trusts are sold like stocks and are highly liquid. So, if you feel selling your trust at any time, you’re welcome to. Plus, you don’t have to deal with lengthy lock-up periods of your funds.
So, if you’re looking to start investing in something that’s fairly low-risk but still quite exciting, REITs might be the best route for you to go. Again, they’re not completely without risk, but they’re much safer than hedge funds in terms of preserving your money. Plus, you get to say that you own property, which is cool in and of itself.
Making the Right Choice
Whether you decide to invest in a hedge fund or buy some REITs is entirely up to you. Or, maybe you want to combine the two and buy real estate REITs. All options are perfectly reasonable as long you feel they’re right for you and your lifestyle.
Before making an investment, always consider factors like accessibility, risk and reward, and the excess fees they might charge. Then, choosing between hedge funds and REITs is a breeze.