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Are there special disadvantages associated with Hedge Funds?

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Yes, because the very instruments which allow for potentially greater returns also add elements of risk to hedge fund investments. While strategies such as short-selling and leverage offer investors an opportunity to profit despite a down market, such strategies may also result magnify investor losses. Furthermore, because of the number of financial instruments available within a hedge fund, the success of a hedge fund depends heavily upon the skill of individual hedge fund managers. The returns of a hedge fun are closely tied to the timely use of the many strategies available, so an investor unfortunate enough to invest in a poorly managed hedge fund is more likely to incur losses than someone who invests in a less volatile venture. As a result, investors must be even more diligent than normal when considering hedge fund investment.

The added privacy of a hedge fund, which many investors consider an advantage of hedge fund investment, may also serve as a disadvantage for potential investors. The light regulation of hedge funds increases the possibility of fraud, but the privacy of hedge fund investments increases the difficulty of thoroughly examining a particular hedge fund. Additionally, the lack of regulation means that hedge fund managers are not required to provide frequent return reports, so investors may often be unaware of their returns for extended periods of time.

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