Hedge Funds

You read and hear a lot about hedge funds. Unfortunately, most of what you hear is negative because it comes from the major media that has an interest in reporting negatives about them because the major media is supported by so-called standard mutual funds and brokerage companies that spend big bucks for advertising. Hedge funds are NOT allowed to advertise.

First of all a hedge fund is almost identical to a mutual fund. There have actually been fewer fraud complaints about hedge funds than about mutual funds. That doesn't mean they don't lose money just as regular mutual funds do.

The underperformance of mutual funds is not highlighted in the press; you don't bite the hand that feeds you. I'm talking about advertising revenues. Would Janus, Invesco, Vanguard or any big fund family continue to place advertising dollars with someone who told stories about their losing funds or recommended that investors sell them to find a better performer? Hardly.

Mutual funds use customers' money to buy stock and bonds. Hedge funds are not limited to what they can buy. The can buy or short sell derivatives, commodities, options, oil and gas leases, freight rates and even take an investor's money to the race track (although I doubt if they would). The managers of these funds are specialists in their field of knowledge and many do extremely well. Just because they are different doesn't make them bad. Like all investments you must know where your money is going and how it is going to be invested.

The one major difference is how the fund manager is paid. Regular mutual fund managers are paid on how much money they manage and NOT on performance. Hedge fund managers usually receive 1% of the fund assets that goes for expenses and 20% of the profits they make for their investors. In other words if they don't make a profit for you they don't get paid. I sure would like to see them do that in regular mutual funds, but the Securities and Exchange Commission is the captive of the mutual fund industry so don't hold your breath. The true ability of fund managers would be exposed and many funds would disappear as the smart investors would be transferring their money to fund managers who have winning records every year. Yes, every year. No more of the nonsense of how they beat the S&P500 by 5% yet lost your money.

So many of the hedge fund articles say the investors are being hood winked into putting money into these funds. I don't think so. Almost every big state and corporate pension plan, university endowment, charitable trust and other large financial plans have money in hedge funds. Like any cautious investor they did their due diligence to find out the track record and management capabilities of the hedge fund.

You have to be rich to put money into a hedge fund. They require an income of $200,000 per year and assets of one million or more. Many require large initial investments.

If you qualify they are definitely a better place than a regular mutual fund, but you must do your due diligence.

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Copyright 2005