Hedge funds: Going nowhere fast

If investors are seeking higher returns with lower volatility they are wasting their time. The Wall Street bullies understand that investors are driven by fear and greed. They use this to convince investors to move their money. Your best strategy is to own equities, globally diversify and rebalance. This along with discipline will reduce your anxiety and improve results.

Hedge Fund Managers - Lynching Party Needed
Hedge Fund Managers – Lynching Party Needed (Photo credit: smallislander)

The S&P 500 has now outperformed its hedge-fund rival for ten straight years, with the exception of 2008 when both fell sharply. A simple-minded investment portfolio—60% of it in shares and the rest in sovereign bonds—has delivered returns of more than 90% over the past decade, compared with a meagre 17% after fees for hedge funds (see chart). As a group, the supposed sorcerers of the financial world have returned less than inflation. Gallingly, the profits passed on to their investors are almost certainly lower than the fees creamed off by the managers themselves.There are, of course, market-beating superstars, as you would expect in an industry with nearly 8,000 participants (and rising). The top decile of managers has served up returns of over 30% in the past year, according to Hedge Fund Research, a data provider. But a third have lost money, including some of the stars of yesteryear: John Paulson, celebrated as an investment wizard in 2007 for having foreseen America’s housing bubble, reportedly saw his flagship fund lose 17% in the first ten months of 2012, after a 51% fall in 2011.

The Wall Street bullies are continually looking for ways to attract new money. The record of hedge fund managers is similar to that of actively managed mutual funds. There are some lucky managers who outperform, Unfortunately past performance does not correlate with future results.

Please comment or call to discuss how this affects you and your financial future.

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