Do Hedge Funds Beat the Market?

gurusAre you missing out on the supposedly huge amount of profits to be made by investing with a “Guru” in his Hedge Fund?

Hedge funds are like mutual funds, but they are managed by self titled “experts” who charge an enormous fee to try and beat the market.  Hedge funds and Investing Guru’s are built on the premise that a smarter guy with a faster computer can make miracles possible by uncovering inefficiencies in the market or predicting the future.  They are attractive to so called “sophistocated investor” who wouldn’t be caught dead investing in boring index funds.

Do Hedge Funds Beat the Market?

“According to a report by Goldman Sachs released in May, hedge fund performance lagged the Standard & Poor’s 500-stock index by approximately 10 percentage points this year, although most fund managers still charged enormous fees in exchange for access to their brilliance. As of the end of June, hedge funds had gained just 1.4 percent for 2013 and have fallen behind the MSCI All Country World Index for five of the past seven years, according to data compiled by Bloomberg. This comes as the SEC passed a rule that will allow hedge funds to advertise to the public for the first time in 80 years.” 1

Studies continue to come in showing real data of the horrible returns of hedge funds vs. the whole market.

“Harken back to a decade ago. Your broker recommends an investment in a hedge fund. Your registered investment adviser disagrees. She recommends you invest in an index fund composed of 60 percent stocks and 40 percent bonds. You go with the broker’s recommendation. You don’t want “average” returns. You want your money managed by the best minds in finance.

Fast forward to today. According to a Harvard Business Review blog, a composite index of more than 2,000 hedge funds returned 72 percent over the past decade. The index fund, which took significantly less risk, had a return of about 100 percent, while charging much lower fees.

You would think these dismal returns would have dealt a crippling blow to the hedge fund industry. Not so. Hedge funds remain the darling of many pension plans. According to the same blog, hedge funds that go long and short on stocks and invest in equity derivatives managed a mere $865 billion a decade ago. Having demonstrated their lack of investment skill, these fund managers now manage more than $2.4 trillion. Go figure.” 2

Takeaway

Hedge funds are flashy and somehow popular, but if you want long term growth in your retirement accounts you should stay as far away from them as possible.   Instead, invest in a diversified portfolio,  and find an investment coach who will educate you especially in down markets.

by Jimmy Hancock

References

1. Kolhatkar, Sheelah. “Hedge Funds Are for Suckers.” Bloomberg Business Week. Bloomberg, 11 July 2013. Web. 14 July 2014. <http://www.businessweek.com/articles/2013-07-11/why-hedge-funds-glory-days-may-be-gone-for-good>

2. Solin, Dan. “The Fleecing of Investors Continues.” The Huffington Post. TheHuffingtonPost.com, 17 June 2014. Web. 17 July 2014. <http://www.huffingtonpost.com/dan-solin/the-fleecing-of-investors_1_b_5487788.html>.

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