Hedge funds have traditionally required large minimum investments, restricting access mainly to institutional investors and ultra-high net-worth individuals. However, options are expanding for investors with limited capital to gain hedge fund exposure.
Challenges of Investing in Hedge Funds
Before covering available options, it helps to understand why hedge funds set such high minimums, often between $250,000 to $1 million for individual investors:
- Operating costs: Hedge funds have fixed overhead to cover compliance, reporting, infrastructure, and operations. More assets help absorb these costs.
- Manager capacity: Many funds purposely limit assets under management to remain nimble executing their strategy.
- Liquidity mismatches: Hedge funds often invest in illiquid assets but offer monthly or quarterly liquidity to investors, requiring larger cash buffers.
- Regulations: Most hedge funds qualify for exemptions from registration which limit their investor base to accredited investors only.
- Marketing costs: It takes the same sales, marketing, and investor relations effort for a $100,000 investment vs. a $10 million investment. Larger allocations are more viable.
- Investor servicing costs: More investors means more reporting, statements, tax forms, communications, and relationship management.
While these reasons limit small investors generally, the tide is turning with more lower minimum options emerging.
Hedge Fund Mutual Funds and Liquid Alternatives
One approach gaining popularity is packaged hedge fund strategies into SEC-registered mutual funds with lower investment minimums, daily liquidity, and no accredited investor requirements. Some options in this area:
Mutual Funds of Hedge Funds
These pool capital into a variety of hedge fund managers within a single mutual fund. Examples include:
- The Natixis ASG Global Alternatives Fund (GAMAX) – minimum $2,500
- Goldman Sachs Fund of Funds (GFFAX) – minimum $5,000
Upside is diversification across multiple hedge fund strategies. Downside is two layers of fees – one at the fund of funds level and again at the underlying hedge fund level.
Alternative Strategy Mutual Funds
Mutual funds replicating hedge fund strategies like long-short equity, managed futures, merger arbitrage, market neutral and more. For example:
- IQ Hedge Multi-Strategy Tracker ETF (QAI)
- JPMorgan Hedged Equity Fund (JHEQX)
- Fidelity Multi Asset Absolute Return Fund (MAAFX)
Benefits are lower minimum investments like $1,000-$5,000, daily liquidity, and tax reporting via 1099s. Drawbacks are higher expense ratios, more diversified strategies, and lower expected returns than dedicated hedge funds.
A newer class of mutual funds providing hedge fund-like strategies in a mutual fund vehicle. Some examples are:
- AQR Style Premia Alternative Fund (QSPIX) – minimum $5,000
- Blackstone Alternative Multi-Strategy Fund (BXMIX) – minimum $2,500
- Goldman Sachs Absolute Return Tracker Fund (GJRTX) – minimum $5,000
These expanded the investment strategies beyond classic mutual funds into alternatives like shorting, leverage, concentrated positions, derivatives, and lower liquidity holdings. They offer an intermediate solution but still with limitations versus true hedge funds.
Hedge fund mutual funds and liquid alts offer a more accessible way to invest modest amounts across hedge fund strategies. But expect attenuated returns, more diversification, and higher expenses than dedicated hedge funds.
Direct Hedge Fund Platforms
In recent years, crowdfunding-like “hedge fund platforms” have emerged to give high net worth investors direct access to established hedge funds for lower minimums. Examples include:
iCapital Network – Minimums from $250,000. Over 60 hedge fund offerings on the platform across strategies like equity long-short, distressed, structured credit, derivatives, real estate, private equity.
CAIS – Minimums from $100,000. Connects wealth advisors to private funds and alternative investments. Offers hedge funds, venture capital, private credit, real estate funds.
Artivest – Minimums from $50,000. Over 140 hedge fund offerings including equity long/short, relative value, distressed debt, tactical trading, derivatives-based strategies.
Accredify – Minimums from $50,000. Diverse selection of hedge fund strategies including equity market neutral, macro, fixed income arbitrage, event-driven, emerging markets.
These platforms conduct due diligence and allow investors to review fund documents and investment theses. Benefits include lower minimums, easier access to hedge fund managers, education, and consolidated reporting. Drawbacks are limited selection of funds versus the whole universe. But platforms allow direct hedge fund investing for those with at least $50,000 to $250,000 allocate.
Investing in a Fund of Hedge Funds
Fund of hedge funds (FOF) pool capital from multiple investors to allocate across 10-40 underlying hedge funds typically. For example:
- SkyBridge Capital Series G II Fund – $25,000 minimum
- Barclay Multi Strategy Fund – $5,000 minimum
- Blackstone Alternative Multi-Manager Fund – $5,000 minimum
Benefits include diversification across hedge fund managers and strategies, lower minimums, access to top-tier funds, and professional manager selection/due diligence by the FOF manager. Drawbacks include an extra layer of fees at the FOF level which can reduce net returns. But FOFs open quality hedge fund investing to those with just $5,000 to $50,000 to invest.
Some hedge funds create customized “feeder funds” specifically geared for smaller investors. Feeder funds aggregate smaller investments which then feed into the main master hedge fund. This avoids high minimums to invest in the actual hedge fund. For example:
- HSBC Alternative Investments feeder funds – $25,000 minimum into various hedge fund strategies
- SkyBridge feeder funds – $25,000 into niche strategies like quantitative investing
- Citadel feeder funds – $25,000 minimum into equity strategies
Benefits are lower investment minimums of around $25,000 and access to top managers. Drawbacks include less liquidity than the main hedge fund and very limited control over the investments. But feeder funds are a viable way to participate in an established hedge fund’s success with limited capital.
Some hedge funds allow smaller investors to co-invest alongside their main fund into specific deals. For example, investing directly into a private company pre-IPO round the hedge fund leads. This gives the individual investor exposure into an opportunity that would normally require millions to access directly.
Perks beyond direct access are getting a closer view of the hedge fund’s deals and strategy. Drawbacks are co-invests are irregular and dictated by the hedge fund’s pipeline. But even with limited capital, strategic co-investing provides valuable education and opportunities.
Secondary Market Purchases
A small niche secondary market exists to buy and sell limited partnership interests in existing hedge funds from other investors looking to exit or rebalance. This bypasses minimum required for new fund subscriptions. Transactions happen over the counter between buyers and sellers of fund stakes.
Benefits include potential discounts to net asset value when purchasing positions and accessing top managers close to new investments. The downsides are illiquidity, high transaction costs, and often inferior economics. But secondary purchases open another route to hedge fund investing for smaller investors willing to pursue secondhand interests.
Choosing Appropriate Vehicles
With the growing options for smaller capital to access hedge funds, investors should:
- Assess their minimum investment size – $50,000, $100,000, $250,000? Different vehicles have different minimums. Understand how much you can allocate.
- Research fees and liquidity – FOFs and platforms add a layer of fees. Feeder funds often have less liquidity. Mutual funds have daily liquidity. Compare structures.
- Evaluate fund selection abilities – If lacking experience evaluating hedge funds, lean towards fund of funds or platforms providing that manager selection expertise.
- Diversify strategically – Blend different vehicles and strategies instead of selecting just one fund. Diversify across multiple underlying managers.
- Focus on risk-adjusted returns – Absolute returns matter but avoid chasing unsustainable high returns with leverage risks. Prioritize consistency.
With rigorous analysis and diversification, retail investors can prudently deploy limited capital across top-tier hedge fund strategies.
Performing Due Diligence as a Smaller Investor
Conducting proper due diligence is vital before investing even modest amounts into a hedge fund. Key steps to take:
Verify Regulatory Compliance
- Ensure the manager is properly registered as an RIA with the SEC or state regulator.
- Review their ADV filing for disclosed disciplinary history and material conflicts.
- Validate they meet accredited investor, qualified purchaser requirements.
- Check they issued 506(b) or 506(c) private placement forms.
Review Independent Audits and Administrators
- Request third-party audited annual financials. Inspect for any adverse opinions or going concern risks in the notes.
- Verify a reputable independent administrator handles valuation, accounting, and reporting for the fund. This reduces fraud risks and provides checks on the manager’s own reporting.
Analyze Performance and Risk Metrics
- Scrutinize long-term returns through multiple market environments over 5-10 years. Insist on audited net figures.
- Calculate risk-adjusted return metrics like Sharpe, Sortino, alpha to confirm quality of returns beyond just absolute performance.
- Evaluate worst-case drawdowns – were there market dislocations that severely affected strategies? How long to recover?
Interview the Manager and Team
- Meet with the manager directly, ask pointed questions, assess their true expertise.
- Request bios of the key team members – do they have solid industry experience?
- Get comfortable with the investment philosophy and edge of the particular strategy.
Review Offering Documents Thoroughly
- Read the PPM, limited partnership agreement, subscription docs carefully.
- Understand the fund’s fees structures, incentive schedules, and conflicts of interest.
- Confirm you meet eligibility requirements as an accredited or qualified investor.
- Review redemption terms, lock-ups, and liquidity limitations that restrict withdrawals.
Conducting detailed due diligence reduces blind spots and helps validate manager quality before investing.
Investing Best Practices for Smaller Investors
Those investing limited capital into hedge funds should follow certain best practices:
- Start small – Allocate 10-15% of your portfolio to alternatives initially as you build experience. Limit any single fund position size to 5% of your overall portfolio value.
- Diversify – Spread capital across multiple hedge funds and investment strategies. Diversify by sector, geography, asset class. Use varied vehicles like FOFs, direct funds, feeders.
- Focus on risk-adjusted returns – Seek lower volatility funds with consistent absolute returns through market cycles rather than shoot for unsustainably high returns using excess leverage. Prioritize Sharpe Ratio.
- Favor fee-conscious managers – Negotiate lower fees or find managers charging fairer performance-based fees. High hedge fund fees erode compounding gains from smaller investment amounts disproportionately over time.
- Invest for the long-term – Accept necessary lock-up periods and illiquidity to allow fund managers to execute their proven strategy. Avoid chasing short term performance.
- Reinvest proceeds – Plow gains from successful alternative investments back into new opportunities rather than spending proceeds. Reinvesting compounds returns.
- Learn from results – Let experience guide future investments. Focus on managers and strategies that consistently generate superior risk-adjusted returns net of fees.
With prudent diversification and a focus on risk-adjusted returns, smaller investors can generate good outcomes investing limited capital into hedge funds.
Key takeaways for investors with limited capital seeking hedge fund exposure:
- Mutual funds and liquid alternatives offering hedge fund strategies have emerged with minimum investments under $10,000 in many cases. These provide a low barrier to entry.
- Hedge fund platforms like iCapital Network, CAIS, and Artivest allow accredited investors to access established hedge funds for minimums between $50,000 to $250,000.
- Fund of hedge funds pool investor capital and often have minimums between $25,000 to $50,000 to invest in a diversified set of hedge funds.
- Feeder funds sponsored by hedge fund managers offer another route with minimums around $25,000 into specific strategies.
- Co-investment opportunities directly into deals led by top managers arise occasionally for limited partners.
- In secondary markets, investors can buy stakes in existing hedge funds to bypass minimums required for new investors.
- Conducting thorough due diligence remains critical even when investing smaller amounts into hedge funds.
With the right vehicles and prudent portfolio construction, those with less than $1 million can implement hedge fund strategies today. But care is required to diversify and avoid excessive risks.
While the bulk of hedge fund assets are still concentrated at large institutional investors, the menu of options is growing for smaller investors to participate. Mutual funds, fund of funds, specialized platforms and feeder funds now cater to those with just $25,000 to $250,000 to invest at minimum. Performing diligent due diligence, diversifying across multiple funds, and focusing on risk-adjusted returns allows smaller investors to prudently invest in hedge strategies. Hedge funds should not dominate small portfolios but can add valuable diversification. With sound analysis of structures and managers, even retail investors now have routes to benefit from hedge fund investing.
Frequently Asked Questions
What hedge funds allow small investors?
Some hedge funds accepting smaller investors include:
- Meditor Capital Management – $100,000 minimum
- Anchorage Capital Partners – $250,000 minimum
- Tourbillon Capital Partners – $250,000 minimum
- Broad Peak Fund – $250,000 minimum
- HealthCor Management – $250,000 minimum
- Criterion Capital Management – $250,000 minimum
- Eton Park Fund – $500,000 minimum
- Viking Global – $500,000 minimum
- Glenview Capital Partners – $500,000 minimum
- Scout Capital Management – $750,000 minimum
Many established firms do accommodate clients, family offices, and institutions starting with a few hundred thousand dollars, especially on stock-focused strategies. Emerging managers more open to smaller allocations as well.
How can small investors invest in hedge funds?
Options for investors with limited capital to gain hedge fund access include:
- Mutual funds – Invest in liquid alt mutual funds and hedge fund replicators. Lower fees and minimums under $10K.
- Fund of funds – Achieve diversification across 20+ hedge funds for minimums like $25K.
- Direct hedge fund platforms – Minimums between $50K-$250K into individual hedge funds.
- Feeder funds – Manager-sponsored feeders pool smaller investments into their main hedge fund for $25K+.
- Co-investments – Invest directly into deals led by hedge funds as a limited partner.
- Secondary market – Buy stakes in existing hedge funds from current investors.
Each path has tradeoffs but opens hedge fund access to non-institutional investors.
What are typical hedge fund minimum investments?
Typical hedge fund minimum investments are:
- Institutional Investors – $5 million to $20 million+ minimums
- Very High Net Worth Investors – $1 million to $5 million
- Individual Accredited Investors – $250,000 to $500,000
- Smaller Investors via Feeder Funds – $25,000 to $100,000
Lower minimums apply to emerging managers under $200 million AUM. Larger, institutional funds require millions. But vehicles like feeder funds allow entry under $100K. Minimums also depend on the strategy. Niche funds tend to require more capital.
In another related article, Top 5 Hedge Funds of 2023 Based on Performance and Assets Under Management