Wealth management Carlsbad

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Investing in Hedge Funds, PART 3

Wealth management CarlsbadInvesting in hedge funds is not for all Carlsbad residents. This is not simply a matter of financial advice, but a legal requirement, as spelled out in the Securities Act of 1933. This Act requires that hedge funds may only accept accredited investors, or those with at least $1 million in net worth or $200,000 annual income.

Read PART 1 and PART 2 of this series first, or continue…

Wealth Management Advice for Carlsbad Residents: Hedge Fund Fees

Fees for investing in hedge funds can be substantial and can significantly reduce net returns. The usual fee structure is a 2 percent flat fee of total investment plus 20 percent of investment gains. However, many funds have a high water mark.

“Fees are only charged on investment gains when the investments have a greater value than this mark, thus eliminating the potential to pay gains on the same growth multiple times,” explains JKL Wealth Management expert in Carlsbad, John Lohrenz. “Funds of funds are good investment vehicles that can be used to gain access to multiple hedge funds. However, there are additional fees charged by these funds, on top of the fees charged by the funds that they invest in. Thus, hedge fund fees can greatly reduce or even eliminate investment gains.”


Like any other investment, investing in hedge funds comes with associated risks. These funds are intended to lower overall risk to the portfolio while potentially increasing return prospects, but still have the following individual risk characteristics:

  • Transparency and regulation: Because of the investor requirements for hedge funds, there is little regulation that requires these funds to disclose their practices or individual positions in stocks.
  • Liquidity: Most funds have lock-up periods, which can make it impossible to withdraw funds without proper notice. The available time frames for withdrawals can be quarterly or even annually.
  • Leverage: Some funds have historically borrowed significantly more than the money they started with in an effort to magnify positive returns. The downside to this is that losses are also magnified. To put this into perspective, some funds may borrow $4 for every $1 invested, for a total of $5. This means that if 20 percent is lost on the total, that all of the original $1 investment is lost.

Wealth Management Advice for Carlsbad Residents: Key Points to Remember

  • The suitability of the hedge fund style and the individual wealth manager selected as it relates to portfolio objectives and constraints is the most critical part in this decision process.
  • Performance of hedge funds should be assessed with tax implications and fees in mind.
  • Due to minimal regulation of their practices, hedge funds require significant due diligence.
  • Hedge funds can have a very positive impact on both return and risk within the portfolio due to their diversification potential.

Let’s Get Connected!
If you want to get started on your journey today or would like individualized investment/financial advice from LPL financial advisor, John Lohrenz, please contact JKL Wealth Management at:

Phone: (858) 535-1705
Fax: (858) 535-1701
Email: john.lohrenz@lpl.com

Alternatively, fill out the Contact Form and we’ll get back to you shortly.

Physical Address
731 S. Hwy 101, Suite 2K, Solana Beach CA 92075

Securities and Advisory services offered through LPL Financial, a registered investment Advisor. Member FINRA/SIPC.

About Carlsbad, North San Diego County

Carlsbad – sitting 52 feet above sea level – is a wealthy city, similar to that of a seaside resort, situated in North San Diego County. Carlsbad is separated into four unique quadrants: northwest, northeast, southeast and southwest. This makes growth management and city planning simpler. Carlsbad boasts a warm Mediterranean climate and is popular for is stunning beaches – some of the best in California – as well as the fields of flowers located at Carlsbad Ranch. These feature the Giant Tecolote Ranunculus plant.

Residents of Carlsbad can take a trip down memory lane and visit the national landmark Old Santa Fe Depot, which was built in 1907 and has the area’s Visitor Information Center within it. Alternatively, they can visit the place of John Frazier’s well, located at Alt Karlsbad, a copy of a German Hanseatic house.