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Hedge Funds Have Significant Risks
Hedge funds have many risks, but especially consider three that are quite significant.
First, manager risk. Increased compensation (20% of gains and 1% of assets) lure bright managers, but many flame out after a few years on the job. Even those who make it tend to perform best during their early years.
Second, liquidity risk. 25% of hedge funds limit withdrawals to once per year. 44% allow withdrawals quarterly.
Third, reporting. Many hedge funds do not follow the AIMR performance reporting standards. Thus, comparisons among hedge funds can be difficult. Additionally, some hedge fund reports take a long time to arrive.
Source: Investment Advisor, August 2001
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