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Five Things to Ask Before Investing in a Hedge Fund
CNBC.com | April 06, 2012 | 04:35 PM EDT

Hedge funds engage a broker to execute their trades. Check with the brokerage firm that the hedge fund has an account with them as they claim. “You should perform a background check on all their service providers,” says Ackles, especially the fund’s administrator—the outside vendor who handles accounting and other back office chores. “Are they with a Big Four accounting firm, or some guy in a shopping mall?” A self-administrated fund is probably not a good bet.

While you’re talking to the administrator, ask whether the fund manager has a personal stake in the fund. "If they believe in their strategy, they should have some skin in the game,” says Ackles.

Meet with the fund manager in person. Take a look at the operation and the equipment he or she is using. “If they are day trading, they should have Bloomberg terminals,” Ackels says. If the employees are using substandard equipment or working out of a private home, you can generally take it as a bad sign.

The most important question is for yourself: How much of an investment makes sense? Successful hedge funds put up their alluring numbers by making very aggressive bets in the market. Even the wealthiest investor can’t afford to live on high risk alone. “This is an investment for a sliver of your portfolio,” warns Marc Freedman, “not the entire pie.”

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