Sunday, November 29, 2009

Hedge Funds – Mistakes by Investors

Over the past few decades, myriads of investors have turned to hedge funds in an attempt to spruce up their investment strategy. Sadly, though, the vast majority of customers have found the results to be distressing.

In particular, even the top tier of hedge funds paid out less to the patrons than the returns on the market benchmarks. Meanwhile the outcome for the majority of clients was far bleaker.

During benign periods in the stock market, the leading group of hedge funds can pretty much keep up with the marketplace in terms of the gross returns on investment. An example of a sunny stretch lay in the last couple of decades of the 20th century.

On the other hand, the fact that the high flyers can roughly match the market averages does not mean that their clients do likewise. One big stumper is that the operators take a cut, usually amounting to 20 to 50 percent of the earnings, whenever the funds happen to turn in any profits. After the haircut, the investors end up trailing behind the market benchmarks.

But that is only part of the story. The outturn is much worse when the market at large breaks down.

A stark example was the wholesale rubout of hedge funds during the financial crisis of 2008. Amid the mayhem, the investors ended up losing their shirts.

Given this backdrop, why do so many investors clamor for hedge funds? One reason lies in the desire to spread out the risk across different types of assets in a personal portfolio.

What some folks seem to forget, though, is that the precept of diversity is grounded on the premise that each of the assets happens to be sound. Put another way, does not make sense to diversify into a losing proposition.

More on Hedge Funds – Mistakes by Investors.

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