More Investing 201

We’ve helped you understand more about investments and the lingo you need to know in the last few columns. Now, let’s look at Managed Accounts, Hedge Funds, and Options and Futures.

The Managed Account
Managed accounts (sometimes called “separate accounts”) are simply portfolios constructed by professional money managers for particular investor clients. Since the portfolios are “managed,” fees are imposed on the investor, usually 1-3% of the assets under management. The portfolios consist of individual securities and therefore can be tax managed according to the needs of the investor. Many investors today are seeking some relief from the tax burdens imposed on mutual funds by selecting “managed accounts” instead of mutual funds for their investments.

In a managed account, a manager helps you structure your long-term investment portfolio, which can be composed of individual securities, mutual funds, bonds or Exchange-Traded Funds (ETFs). The manager watches the portfolio and sells and buys securities in the portfolio to minimize the tax effects of capital gains. As an investor, managed accounts should offer you periodic reporting on the value of your investments, consultation with a professional advisor and tax statements for year-end reporting.

Hedge Funds
Hedge funds are structured as mutual funds, meaning that shares in a hedge fund represent a portfolio of securities. Unlike mutual funds, however, hedge funds are not yet required to be registered with the SEC and make the same types of public disclosures of holdings or portfolio management strategy. Because hedge funds are sold in private placement transactions exempt from SEC registration, they can only be sold to “accredited” or sophisticated investors with a minimum net worth of $500,000 and $100,000 in disposable income. These investors are presumed by law to be more educated about the risks of their investments and therefore are not deemed to need the type of public disclosures required of SEC registered mutual funds.

Different hedge funds use differing techniques to achieve higher rates of return and generally are more risky than other investments. Hedge funds are increasingly being used as part of asset allocation strategies for high net worth investors.

Ordinarily, the compensation of the money manager of the hedge fund is directly tied to the performance of the portfolio and many hedge funds use management techniques they like to keep confidential. Hedge funds are a newer phenomenon for the average investor and there is little public information available on them. It is wise to be very careful before investing in any hedge fund—you need to understand the strategy of the fund before you invest. If the hedge fund manager or your investment professional cannot explain the strategy to you, don’t invest in the fund. Your mother and father were right again—if it looks too good to be true, it probably is. Walk away from such investments and don’t look back.

You’ve done your motivation list and learned about understanding risk. Where do you fit within the investment styles we’ve discussed? Can you start imagining what styles appeal to you? Think about having $1,000—how would you allocate your $1,000 to the different investment styles?

Options and Futures
Options and futures are trading mechanisms used by professionals primarily to protect their investments. Sophistication is required to use these instruments. I do not recommend individual investors attempt to use options or futures for their own portfolios without some professional guidance. As noted, however, you need to understand how these trading mechanisms work before you follow the advice of a professional. To do that, check out some of the excellent websites available such as www.wfn.com (“Women’s Financial Network”) that will provide you with a basic education on options and futures.