Sunday, December 23, 2012

HuffPo Blog: For Hedge Funds, It's All in the Game




"There are few greater examples of the irrationality of investors than the world of hedge funds. Hedge fund managers are paid enormous sums, usually 2 percent of the investment amount and 20 percent of profits above a fixed level. As money has poured into these funds over time, hedge fund managers and others working in the industry have become fabulously wealthy. But, now, here's the rub, the investors haven't benefited. In fact, hedge fund investments have consistently performed substantially worse than basic investments in low-fee equity index funds, exchange traded funds or a simple mix of equity and bond funds.

"I am an outsider to the world of hedge funds in that I neither work nor invest in hedge funds. Without an ounce of insincerity, I can state that I don't understand how this industry survives, let alone has thrived for so long. Hedge funds are not generally open to average investors, but rather receive their funding from institutional investors (the source of roughly two-thirds of hedge funds' assets) and people categorized as sophisticated investors (presumably wealthy individuals with investing knowledge/experience).

"Those investing in hedge funds are generally not na├»ve to the fact that these funds, on average, provide much lower returns than equity indexes. Moreover, investors generally are aware that the lower returns are due to the high fees that the hedge fund managers extract from investors. Yet, in spite of the historically poor return on investment, money continues pouring into hedge funds -- they currently manage $2.2 trillion in assets or roughly four times more than in 2000….
More?  Go read http://www.huffingtonpost.com/howard-steven-friedman/for-hedge-funds-its-all-i_b_2353416.html

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