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    Beyond the Glory: Hedge Funds

    By Stock Charts | July 16, 2007




    Here’s another article I came across on hedge funds, featured on IWillTeachYouToBeRich.com. While many perceive hedge funds as some sort of mythical investment vehicle that offer astronomical returns, the reality is that most hedge funds fail to live up to expectations.

    In a study published in the June, 2003, issue of the Journal of Financial and Quantitative Analysis, he and a co-author, Gaurav Amin, an analyst at Schroder Investment Management, a British financial firm, compared the fee-adjusted returns of seventy-seven hedge funds between 1990 and 2000 with the returns generated by a market benchmark that had a similar risk profile. Seventy-two of the funds—more than ninety per cent—failed to outperform their benchmarks.

    The basic hedge fund fee structure imposed on the investor is known as “two and twenty,” where the fund charges a 2% management fee as well as 20% of the profits. Because the minimum requirements for investing in hedge funds are so high, even if the fund does poorly the 2% management fee still brings in a significant amount of cash. However, while these investors clearly have some cash to spare, one wonders how long this charade can last.

    Source: New Yorker

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    Topics: Stock Charts | 1 Comment »

    One Response to “Beyond the Glory: Hedge Funds”

    1. Dan Says:
      July 19th, 2007 at 10:03 am

      I’ve always been kind of confused about statistics about hedge funds and how they often miss “benchmarks.” Are these benchmarks selected by the funds themselves or by some other party. I feel that there is some misconception as far as what hedge funds are and what they are supposed to do. These days hedge funds seem to define any sort of investment partnership which can have any sort of investing strategies ranging from highly risky to rather conservative. Truth be told, the original hedge fund (and I would hope still remain the majority of funds that exist today) was not necessarily meant to beat the broader markets in any one year. A HEDGE fund is meant to do exactly that, hedge against down years. Thus, a good hedge fund might just track the markets or return just below the markets during bull markets and hopefully beat the tar out of the markets during bear markets. If you think about it, the rules of probability for any long/short fund would seem to dictate that they underperform bull markets and outperform bear markets. After all, unless you’re one hell of a stock picker, your longs and shorts should generally move in opposite directions.

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