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A lot of articles have appeared about a “new” investment called hedge funds. These are a growing collection of “alternative” investments in things like oil–well partnerships, direct investment in privately held companies, foreign currency ETFs that are advertised as being able to produce superior returns. There are even hedge funds targeted for retirement, as well as mutual funds that use hedge fund strategies to generate retirement income. Sounds good doesn’t it? An investment that can actually beat the market regardless of whether the market goes up or down? Wow! The problem is it’s mostly sales hype. A recent study indicated that hedge funds actually lag the market as a result of high management fees and less than stellar total returns. In another recent study a few hedge fund managers were identified who did acheive superior performance, but their performance only lasted for three years or so–and it is extremely difficult to identify these superior performing managers ahead of time. The management fees and expenses of hedge funds are truely breathtaking. Most hedge funds charge a management fee of between 1% and 2% of assets, plus 20% or more of profits. If you invest in a fund of funds you’ll also pay an additional fee to the main fund which can be an additional 2%. Although hedge funds sound attractive, especially in a falling market with their “story” of always making money in up or down markets, the amount of money in your pocket after fees will most likely be disappointing. Although hedge funds may be “cool”, the fact is they usually make more money for the money managers than for you.
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