Call Us at 610.715.2881 for a No-Cost, No-Obligation Consultation!

Investor Interest in Hedge Funds is Misguided

Investor Interest in Hedge Funds is Misguided

Here at Apollo Wealth Management, Ltd., we’re fans of Dennis Miller and his acerbic wit. To paraphrase his point on race relations in

America, it seems rather silly to hate a person simply for the color of his skin…especially when there are so many valid reasons to hate a person!

We like to carry on in a similar fashion. We’re all about equality. Why bash someone repeatedly when you can bash everyone equally?

To that end, today we’re firing a shot across the bow of the hedge fund industry. You know these people – they’re the men and women who run these secretive investment funds once reserved for the ultrawealthy.

Like any good businessperson, hedge fund managers know that they need to grow in order to survive. After all, why limit the market of potential customers for their product?

Statistics indicate there are now over 8,000 hedge funds with assets of nearly a trillion dollars. The number of hedge funds available to the public is up about 40% over the last two years.

What are we to make of this newfound popularity? Is it due to the lower initial minimum investments? Sure. Is it the allure of promised market-beating returns? Maybe. Is it the false prestige of investing in

something to which the ultra-wealthy previously claimed exclusivity?

Probably. In this respect, we’re not sure it’s much different than the high school kid driving a Lexus. Viva conspicuous consumption!

What we are sure of is that what hedge funds promise versus what they deliver makes them a sucker’s bet.

Hedge funds market themselves as ‘market neutral’ – uncorrelated with and, to a large extent, less volatile than the broad securities markets. However, the growing popularity seems to conflict with recent market realities. Specifically, hedge fund growth has come at a time when the markets have shown a decrease in volatility. Consider that the S&P 500 did not have a single day of 2% variance in 2004.

There were 15 such days in 2003.

To support the decreased volatility observation, consider that The Chicago Board of Options Exchange Volatility Index – a measure of estimated future volatility – trades near its lowest level in nearly a decade. And who among us has not piled into ‘junk’ bonds over the past few years? Spreads on junk – the risk premium investors require over the safety of U.S. government bonds – are at multi-year lows.

So why are hedge funds growing in popularity when market volatility is declining? Well, maybe it’s in the market returns. Let’s have a look…

Over the trailing 12 months, a popular measure of hedge fund activity recorded an 8.3% rate of return versus 10.9% for the S&P 500. Over the past 10 years, the hedge fund index returned 11.4% versus 12.1% for the S&P 500.

Hmmm…it’s not about the returns. OK, maybe it’s about the lower expenses. No, it’s not there either. Most hedge funds charge an annual fee of 2% plus 20% of any profits. The typical S&P 500 index fund (or ETF equivalent) charges about 0.20% and you get to keep 100% of your gains.

Well, at least hedge fund investors enjoy transparency in portfolio reporting. No, it’s not there either. Most hedge funds do not report their holdings…probably because of their rapid-fire trading. Do you want to know what’s in the S&P 500? The answer is a click or two away by visiting the Standard & Poor’s website or those of the myriad mutual fund companies that offer index funds.

Well, at least hedge fund investors can feel safe due to regulatory protection. No, there’s no level playing field here. While regulation of mutual funds is high, little to no regulation exists in the hedge fund world. We’re guessing this is why many hedge funds feel free to rely upon on leverage (and increased risk) to boost short-term returns.

OK, we’ve got it. Hedge funds are liquid, aren’t they? Not likely. In most cases, assets in hedge funds are locked up at least for 90 days.

Many funds allow investors to withdraw some/all of their money but once a year or once every five. Do you want to pull money out of your S&P 500 index fund? You’re just a phone call away!

OK, we admit it: we’re at a loss. Hedge funds have become so wildly popular but they simply can’t stand up to the plain vanilla S&P 500 index in terms of fees, regulation, portfolio transparency, etc.

There’s no doubt that some hedge funds have provided their investors with wonderful results. Like any other industry, the hedge fund world has some worthy offerings. But with the promise of market-beating returns (with lower volatility) comes quite a bit of baggage. Is this what we as investors really deserve? Haven’t we been through enough the past few years?

Thank you hedge funds for giving us something to gripe about.

– – – – – – –

We’ll write to you again soon. Keep visiting our site for frequent updates. Keep those comments coming. We love hearing from you.

Leave A Comment

Your e-mail address will NOT be visible to others and only serves verification purposes.