Many entrepreneurs often consider seeking hedge-fund capital to get their business or new product off the ground.

What is a Hedge Fund?

And is it right for you and your business? Here are three things every entrepreneur should know about hedge funds.

1. Hedge funds are designed to reduce investment risks

The whole purpose behind a hedge fund is to reduce the risk of investments, a practice known as hedging. Hedge fund managers use a variety of different investment techniques, and invest into a range of different asset types in order to generate a higher return for a given level of risk than what is typically anticipated with normal investments. In other words, the risk is less, and the return is higher when compared to other investment formats.

2. Hedge funds can be divided into two different categories

Hedge funds can be divided into two different categories: absolute return funds and directional funds. An absolute return fund is designed to generate a steady, consistent return on the money invested no matter what. Basically, the manager attempts to remove all market risk in order to create a fund that performs well regardless of market performance, meaning the fund’s performance is entirely contingent on the manager’s skill level and expertise. While investing in an absolute return fund is a fairly low-risk venture, the returns offered on these types of hedge funds are low.

Directional funds, in contrast, are hedge funds that are not fully hedged. In other words, there is more risk involved compared to an absolute return fund. While these managers are exposed to the market, they do yield higher than normal returns for the level of risk they take. Directional funds are said to have a stock-like return, meaning that though returns may not be steady from year to year, they offer higher returns than absolute return funds.

3. More and more hedge funds are investing in tech startups

Many entrepreneurs wonder whether or not it is possible to raise venture capital from hedge funds. The answer to this question is both yes and no. Yes, because hedge funds do sometimes invest money in private companies. It used to be that the vast majority of hedge funds would never write checks to startups, and rather would be looking to invest in well-established companies. But the nature of the hedge fund game is changing.

Hedge fund managers are increasingly looking to invest in tech startups specifically. For example, San Francisco hedge fund Coatue Management was the backer behind Snapchat’s $50 million round of funding. Your ability as an entrepreneur to secure hedge fund capital will largely depend on your niche, as well as on your individual business profile. It isn’t an easy feat, but it certainly isn’t an impossible one.

Pivot International is a product design, development, and manufacturing firm with strengths in software development, electrical engineering, mechanical engineering, and industrial design. If you are interested in engineering a new product or updating an existing product, contact us at 1-877-206-5001 or request your free consultation today.