Some large hedge funds, including Fortress, have recently shut down due to poor performance.
Hedge fund management teams can eliminate their losers and re-open new hedge funds under different names to hide their poor performance record.
Yes, hedge funds have produced plenty of millionaires and billionaires. But the people who get rich off hedge funds are the fund managers, not the investors.
Hedge fund investors, for the most part, just end up preserving the wealth they have – or losing it, if they aren’t so fortunate. It’s hedge fund managers who stand to get rich.
And not off their stock-picking skills. They get rich by taking a cut of the assets they manage. Typically, a hedge fund titan rakes in a management fee of 2%, plus a performance fee of up to 20% of the profits.
The Hedge Fund “Bull Story” Really Is Usually Bull
And what do investors get for all that pricey management? Mediocrity, at best.
Since 2009, hedge funds have delivered 7% annual returns, according to Hedge Fund Research and Morningstar. Plain old mutual funds have delivered double that: 14% annually.
People often don’t understand what they’re getting into when they invest in hedge funds.
The sophisticated hedging strategies these funds employ, when executed properly, do little morethan dampen volatility.
Hedge funds go up less than the market during bull markets and go down less during bear markets. Over time, they’ll tend to underperform the market due to the steady erosion of returns caused by hefty management fees.
Whether you have $10,000 to invest or $10 million, the way to generate superior long-term returns is to minimize costs and fees. And that means avoiding hedge funds.