Page 214 - A Canuck's Guide to Financial Literacy 2020

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Hedge Funds

Hedge funds are alternative investments that pool investors’ dollars and invest them into
various financial instruments. Hedge funds try to generate positive return, regardless of
market direction by taking advantage of arbitrage opportunities, using long and short
strategies and utilizing options, to name a few. Due to the flexibility of investment strategies
that hedge funds are able to engage, they’re considered high risk and available only to
accredited investors.

Accredited Investors

An accredited investor is an individual, entity or institution that meets certain income,
financial or net assets criteria. In Canada, the exact definition of an accredited investor can
be found in section 1.1 of the National Instrument 45-106. There are over 20 situations in
where a person might qualify as an accredited investor.

These types of investors are allowed to invest in certain investment instruments that may
not be available to an ordinary investor. Accredited investors would be allowed to invest in
hedge funds. The most common criteria used are mentioned below.

▪ Income Criteria
▪ Your income before taxes has been at least $200,000 or greater in the last two
years and you expect to earn the same level of income this year; OR
▪ You and your spouse have earned at least $300,000 or greater before taxes in
the last two years and you expect to maintain the same level of income this
year.
▪ Financial Assets
▪ You and your spouse have financial assets worth at least $1 million before
taxes, net of related liabilities
▪ Cash and cash equivalents would be considered liquid or financial assets.
▪ Net Assets
▪ You and your spouse have net assets of at least $5,000,000
▪ Fixed and liquid assets would be included to meet this exception.
▪ Other Criteria
▪ For a list of other criteria, please refer to the National Instrument 45-106.

Hedge Fund Characteristics

As hedge funds have more flexibility and freedom to pursue complex investment strategies,
they’re often considered riskier than traditional investments. Higher risk means higher
returns that accredited investors are willing to accept. Below are common characteristics of
hedge funds.