Hedge Fund 101

LTCM, with two Nobel-prize winners, best supporting team and best technologies then, ran their hedge funds into the ground. Many hedge funds are closed due to frauds and/or poor performances.

The primary purpose is supposed to ‘hedge’ your investments from market plunges / dips. Since 2008, the government prints so much money, the market recovers and makes the hedges (shorts, derivatives, etc.) unnecessary. In reality, most hedge funds do not hedge.

Hedge funds get tons of press coverage as the Holy Grail of investing. The media need the advertising from this $2.5 trillion industry. It is similar to a mutual fund but most tend to take more risk for better returns. Most require higher minimum investments and more restrictions (such as longer periods to withdraw the funds).

It could be the worst deal (but best deal to the hedge funds): 2% average up front and 20% average on your profit. It is more acceptable to me if the 20% is on profit over the S&P 500 or any relevant yardstick to the specific hedge fund.

Well, if they make a lot of money for you, it is not too much to ask for. However, most risk your money by betting big recklessly. When they win, they get 20% of your profit and they use you for advertising to lure other suckers. When they lose your money, they do not lose a penny. It encourages them to take big risks. I do not know any hedge fund (HF) manager who pays you back your losses. 

You have better return by investing in a no-load index fund or a diversified ETF than an average hedge fund. To calculate the average hedge fund performance, you need to include those hedge funds that are out of business. 

After a hedge fund has failed, most fund managers just open another hedge fund (if they do not go to jail due to frauds) and give you all the excuse for losing your hard-earned money. Some lose their reputation but you need to check them out.

In 2011, the hedge fund industry did not beat the S&P 500 index fund after fees. I bet the hedge fund industry did not beat the market after 2011.

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Order the book The Art of Investing for the complete article and it is  one among 146 articles.