Investors can direct assets from an individual retirement account (IRA) into a hedge fund. There are certain qualifications that must be met, however. The IRA must be a certain type, known as a self-directed IRA, and the third-party service providers must be equipped to support hedge-fund investing. Investing in hedge funds can be risky, but it can also increase the overall retirement benefit that individuals receive.
An IRA is a type of retirement fund that receives certain tax benefits. In a self-directed IRA, an individual is free to make make his own investment selections. A plan administrator or custodial firm must be hired to hold assets and facilitate the investment transactions. The account holder can diversify assets across investment categories, however, including alternative assets such as hedge funds.
Directing retirement assets into hedge funds can be a risky strategy. In some cases, hedge funds become so large that the fund managers lose flexibility in their investment strategies. Conversely, investing with emerging fund managers who have less of a track record and possibly smaller funds may seem daunting. However, less experienced hedge fund managers delivered more attractive returns in comparison with seasoned fund managers in the 36-month period through March 2011, according to Smart Money magazine.
In the U.S., federal law places a ceiling on the amount of money that can be deposited into an IRA annually to $20,000 for the average investor. The cap on IRA contributions is affected, however, by the type of IRA account and the income that an individual earns. These limits typically increase as an individual gets older. Additionally, certain hedge funds require a minimum upfront investment.
The IRA market is poised to expand, with an estimated $470 billion that will be directed from corporate pensions to these self-directed plans, according to Millennium Trust Company. Nonetheless, certain financial advisers do not recommend investors use retirement dollars for risky investments such as hedge funds. Investors who are determined to invest in these funds should align themselves with advisers or IRA providers with the logistics and the relationships in place to accommodate hedge fund investing.
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