PFwise.com
Search
  • Home
  • Blog
  • Tools
  • Know-how
    • Insurance 101
    • Annuity 101
    • College Planning
    • Real Estate
    • Retirement Planning
    • Smart Investment
    • Stock Ideas
    • Tax Planning
  • About Us
  • 中文
  • Resources
    • Personal Finance Reading List
    • Financial Aid Resources
    • Personal Finance Calendar
    • Retirement Planning Calendar
    • ETF list
    • Financial Glossary
  • Newsletters Archive

5 Cases Against Hedge Funds and Why You Should Care

5/27/2013

0 Comments

 
Picture
A hedge fund, by definition, should hedge risks for its investors, right?

Wrong!  In fact, hedge funds increase risks for investors, dramatically, here are some facts:
  • From 1995 to 2010, hedge fund managers earned $379 billion in fees, the investors in those funds earned only $70 billion in investment gains.
  • About 1/3 of the hedge funds are funded through feeder funds or fund of funds, which means another layer of fees that will further increases the hedge fund managers' fees.

Why such dramatic wealth transfer from investors to fund managers?  Thanks to its hefty fees.

Case 1 against hedge funds - hefty fees
  • Hedge funds charge "2-20" fees: 2% of asset under management, 20% of investment profit
  • Mutual funds' average annual fee: 1.44%
  • Index ETF's annual fee is typically under 0.25%.

Such fees create huge wealth, for fund managers only, and are a big drag on performances, which brings us to the Case 2 against hedge funds.

Case 2 against hedge funds - poor performance
The following data are based on the HRFX Global Hedge Fund Index performance:


In 2012:
  • Hedge funds return: 3.5%
  • S&P 500's: 6% gain 

Over the past fix years
  • Hedge fund index: negative 13.6%
  • S&P 500 index: added 8.6%.  

So far in 2013
  • Hedge funds: 5.4%
  • Mutual funds: 14.8% in average
  • S&P 500's: 15.4%

Smart investment (investing in a low expense index ETF) clearly beats hedge funds easily!

But why investors still sent billions after billions of hard earned money to hedge funds?

For the very elusive benefits, and some non-financial benefits - a bragging right ("I am a limited partners in so and so hedge fund"), access to the client-only market commentaries (which you know how they fare), and a chance to invest in the next star fund manager's hedge funds, which will bring us the third case against hedge funds.

Case 3 against hedge funds - the unpredictable star performers
People have heard of John Paulson, whose bets against subprime mortgages earned him big fame and billions of dollars.  Of course he capitalized that fame and started many more hedge funds, but his performance since then?  One fund lost 52%, and another one lost 35%.  Ouch!

You certainly wish your money is not in one of those funds, but if you are in, can you get out quickly?

Unfortunately the answer is NO, this brings us the case 4.

Case 4 against hedge funds - poor liquidity
For most hedge funds, there is typically two minimums: a minimum amount to invest (that's why it requires investors to be "accredited") and a minimum length of time to keep the money in the funds (usually minimum 1 year), and there is only a very small window when you can withdraw funds,  

If you are truly a billionaire, you probably don't mind losing a few millions, but if you are an ordinary so called "accredited" investor, why do you want to lock money into a hedge fund with unpredictable performance and hefty fees?  Especially when it comes to case 5.

Case 5 against hedge fund - secrecy, with little regulation
The fact is, regulation on hedge funds are beefing up, but when compared with the typical mutual fund industry, hedge funds' operation is still a black box for investors, this should be worrisome given most hedge funds have no limitation in terms of what they can do - they can own derivatives, trade currency futures, buy credit-default swaps, invest in structured products, liquid assets, etc., you name it.

In summary, hedge funds are really for hedge fund managers.  But if you still want to gamble, and not as an "accredited" investor yet, you are welcome to try your luck at the new casino just opened in town - Goldman Sachs Asses management just announced that it would launch a new mutual fund that will allow mom and pop investors to put their life savings into the gambling table, with access to all the trading strategies employed by hedge funds - a Multi-Manager Alternatives Fund (GMAMX), with minimum $1,000 a bet.

Any takers?

0 Comments



Leave a Reply.

    Author

    PFwise's goal is to help ordinary people make wise personal finance decisions.

    Archives

    April 2022
    March 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013
    July 2013
    June 2013
    May 2013

    Categories

    All
    Annuity
    Book Reviews
    College Finance
    Finance In Formula
    Financial Scams
    For Entrepreneurs
    Healthcare
    Insurance
    Investment
    Miscellaneous
    Real Estate
    Retirement
    Savings
    Savings Ideas
    Stock-ideas
    Tax
    Tax-related

    RSS Feed

Copyright © 2013 - 2022 PFWise.com, All Rights Reserved. 
IMPORTANT DISCLOSURES
PFwise.com does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that any material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
About Us | Contact Us 
中文