Hedge Fund Investing

Is Hedge Fund Investing for You?

Stock Market investors have many options available to them to get into the game so to speak.  The most common way Americans invest is through their retirement plans (401(k), IRA, SEP, etc) which usually offer an assortment of mutual funds to choose from.  This requires little maintenance on the part of the investor.  All that is normally required is to determine a percentage of your paycheck to be deposited into the plan and chose the funds to invest in.  The rest is all handled by the plan custodian.  These programs are very popular because most full time workers are content to let professions manager their investments and don’t track the performance more than once per quarter when statements are mailed out.

Those who are passionate about investing usually open individual brokerage accounts or opt for a self-directed retirement account where they can purchase any stock, bond, fund, ETF, are stock options they desire.  One of the primary motivations for having an individual account is the possibility to outperform the general stock market or at least the few mutual funds offered by most retirement plans.  This has become more and more of a reality lately because of the high management fees charged by retirement plan custodians as well as the mutual funds among their offerings.  Many discount brokerages also offer low or even no-cost stock trading.

A sexy option that many investors seek out is that of hedge funds.  Investing in hedge funds is particularly attractive to those who seek market beating returns but don’t have the time or knowledge to achieve it on their own through an individual brokerage account.  Hedge fund investing is not for everyone however.  Here is what you should know before you consider it:

  • Highest Compensated Managers – Hedge Fund Managers are the best paid in the industry with total compensation that dwarfs their Mutual Fund counterparts.  The general theory is by offering the highest pay, hedge funds will attract the best talent to manage the fund holdings thereby outperforming the general stock market.
  • 20% of Profit – Most hedge funds take a hefty chunk of any profits that are achieved.  You should be will to sacrifice 20 percent of your gains to get in to a typical fund.
  • 2% Management Fee – If the fund doesn’t make any money, you are still on the hook to pay them 2% of your total investment value.
  • High Capital Requirement – Most hedge funds require large minimum investment levels.  $250K is usually the bare minimum although there are some ETF’s that offer individual investor’s access for much lower amounts.
  • Multi Strategy / Total Return – Hedge Fund managers generally do not have the same restrictions as mutual fund managers in terms of diversification and adhering to a prospectus that defines an investment methodology.  Some managers have free reign to run a multi-strategy total return fund that can invest in a wide array of bonds & securities.
  • Results – Overall, Hedge Funds do not perform any better than the general stock market.  Many go under after several years of nonperformance which skews the statistics when comparing a hedge fund index to that of the S&P 500.