Author Topic: Invest in hedge fund?  (Read 8944 times)

Rein1987

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Invest in hedge fund?
« on: March 13, 2015, 06:28:14 PM »
All of our portfolio is index fund and some emergency cash/CD. Recently I heard from a few friends around that they are investing in hedge fund and they perform well, which makes me very interest in hedge fund.

Is there any opinion about hedge fund?
We are not looking for invest all our asset in their fund, but how about something like 20% - 30% asset into a hedge fund to diversify our portfolio?

Cathy

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Re: Invest in hedge fund?
« Reply #1 on: March 13, 2015, 06:43:31 PM »
"Hedge fund" isn't an asset class. It isn't even really a well-defined term as far as I can tell. You will have to evaluate the potential investment on its own merits. With the complete lack of information you have provided about the product, there's not a whole lot we can say, other than that purchasing a product because your friends are doing so doesn't sound like a great path to wealth.

kiwigirls

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Re: Invest in hedge fund?
« Reply #2 on: March 13, 2015, 06:47:53 PM »
Agree with above poster - investing in something because your friends are is a terrible idea.  Hardest thing to do IMO is to stick with you own investment strategy & ignore all the noise of other people.  I suggest you research hedge funds in general, the information I have read was not decisive, half the articles & research said they are good for managing volatility, the other half said that the only people who get rich are the fund managers with their 2% management fees & 20% bonuses...

Rein1987

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Re: Invest in hedge fund?
« Reply #3 on: March 13, 2015, 07:03:56 PM »
Sorry for the lack of information..I'll definitely ask more information about the specific fund. As far as I can tell now, its main investment area is in Asia (China, Japan, Korea)

I did some research on hedge fund in general. It looks like instead of just buying and holding shares, they can short and use leverage. I can understand it is general more risky, but in financial crisis environment or long term performance it can have its own advantage.

p.s. Two of those friends are very very rich...They are in their 40s and 50s with paid off homes worth multi-million. They full time volunteer in my church now.

Cathy

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Re: Invest in hedge fund?
« Reply #4 on: March 13, 2015, 07:05:26 PM »
There are many ways to become very rich without being able to determine what kind of security is a good investment. The friends may have good advice, or they may not. You need to have some fundamental knowledge so that you can actually evaluate their investment suggestions on their own merits rather than just blindly relying on them.

phillyvalue

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Re: Invest in hedge fund?
« Reply #5 on: March 13, 2015, 07:43:42 PM »
Unless you have several million to invest, you will not have access to the vast majority of hedge funds. One exception is certain funds which have set up publicly-traded insurance operations, in which the insurance float is invested in a similar or identical portfolio to the manager's main fund. For example, GLRE (Greenlight Re), TPRE (Third Point RE), etc. Another example is Pershing Square, which floated a public vehicle in Europe last fall. I would not recommend investing in the insurance vehicles. While Einhorn and Loeb are brilliant managers, the success of entities such as these require good insurance writing, which they haven't demonstrated. Pershing is interesting but beware tax consequences of buying this in a taxable account. 

The category is so broad that it's hard to say anything intelligent without more information. A "hedge fund" is just a structure, which gives the manager much greater flexibility than the manager of, say, a mutual fund in terms of investment opportunities. There are many different categories you can lump funds into. Greenlight and Third Point, mentioned above, are long/short funds; they aim to have relatively little net exposure to the market. For example, such a fund may have 90% of AUM in long positions and 70% of AUM in short positions, and thus be net 20% long.


LordSquidworth

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Re: Invest in hedge fund?
« Reply #6 on: March 13, 2015, 07:44:47 PM »
Sorry for the lack of information..I'll definitely ask more information about the specific fund. As far as I can tell now, its main investment area is in Asia (China, Japan, Korea)

Isn't my favorite.

I did some research on hedge fund in general. It looks like instead of just buying and holding shares, they can short and use leverage. I can understand it is general more risky, but in financial crisis environment or long term performance it can have its own advantage.

I'd stay away from ones using leverage.

p.s. Two of those friends are very very rich...They are in their 40s and 50s with paid off homes worth multi-million. They full time volunteer in my church now.

Doesn't mean anything.

josstache

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Re: Invest in hedge fund?
« Reply #7 on: March 14, 2015, 12:28:01 AM »
A lot of rich people were invested in this hedge fund and had some great returns until the fund hit some hard times: http://en.wikipedia.org/wiki/List_of_investors_in_Bernard_L._Madoff_Investment_Securities

GGNoob

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Re: Invest in hedge fund?
« Reply #8 on: March 14, 2015, 07:29:59 AM »
I wouldn't. Assuming you currently have a plan and invest in index funds, stick with that. If you don't, create a plan and stick with it.

Read this article from January: http://www.cnbc.com/id/102356275
Quote
Owen Li, the founder of Canarsie Capital in New York, said Tuesday he had lost all but $200,000 of the firm's capital—down from the roughly $100 million it ran as of late March.

But don't worry, he was sorry.
Quote
A hedge fund manager told clients he is "truly sorry" for losing virtually all their money.

forummm

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Re: Invest in hedge fund?
« Reply #9 on: March 14, 2015, 09:23:52 AM »
Why do you want to gamble on such a risky and high-fee fund? If you buy a total market index fund you will get the market return and (absent horrific apocalyptic scenarios, where your money would be likely worthless anyway) won't ever lose it all. But with a hedge fund you're paying a bunch of people (making them insanely rich) to gamble with your money. They win even if you lose. You'd have to spend a lot of time monitoring what they were doing (and they probably wouldn't tell you very much detail). If you're going to spend a lot of time looking into investments and want to gamble for a higher return, why not put most of your money in reliable index funds and then gamble with a small amount of it by buying a stock based on analysis of its merits?

I've seen an analysis that hedge fund returns are similar to other actively managed fund returns. Once you subtract out their fees, there's no more profit there, or your funds are losing ground to the market.

Keep in mind that your friends have been getting rich from the hedge fund at the same time everyone else in VTSAX has been getting rich. Are their returns even as high as VTSAX?

Indexer

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Re: Invest in hedge fund?
« Reply #10 on: March 14, 2015, 09:30:12 AM »
Take everything that is wrong with an actively managed mutual fund, then times it by a hundred, and you get a hedge fund.

1.  The fees are insane.  Sometimes you pay over 2% expense ratio plus 20% of profits.  There are countless studies showing that high fees leads to....
2.  Poor performance.  Hedge funds as a group perform very very badly.  A big thing is the high fees.  They also have performance that is all over the place because...
3.  They are all very very different.  Some of them try to 'hedge' by lowering risk using options and short strategies.  A fund like this should do better in a crisis, however thanks to the high fees they rarely do any better than a very conservative mutual fund(something 80% bonds, 20% stocks like VASIX) in terms of risk or returns.  So why not just get the conservative mutual fund?  Some of them try to speculate, they are basically using options and short strategies to bet on the market.  In theory such a fund could have 20% returns in a good year, or in a crisis like 2008.  In practice the manager who can pull that off doesn't appear to exist.  Such a fund is just as likely to have a -20% return in 2008 and then ALSO a -20% return in a good year.  Loads of risk, loads of fees, very little return.  Regular mutual funds don't do this crap because it has shown to be very risky, and this type of behavior is highly regulated which brings me to point #4...
4.  They aren't regulated.  This is why they attract the Madoffs of the world.  In theory they can do whatever they want.  Options, shorting, etc.  The fact that they aren't regulated and they can trade with very complex strategies also makes them...
5.  Very illiquid.  A hedge fund manager can require that the money stay locked up for at least a year, sometimes longer.  This isn't like a variable annuity where there is a penalty for taking the money out.  The hedge fund is normally organized as a limited partnership with you as a limited partner and the manager as the general partner.  He has 100% control so if he says you can't have your money back yet.... you can't have your money back yet. 

So your money is invested in this highly illiquid very very expensive investment being managed by a guy who can just about do whatever he wants with it and all the evidence says your money will do worse than just putting it in an index fund with a similar risk profile. 

Oh, and did I mention the minimum investment in one of these things is normally 1 million?

Hedge funds have shown to be VERY good at making some people rich... the managers.  All the evidence shows they aren't good investments, but they still exist for one reason.  If you are a multi millionaire(10m+) drinking a thousand dollar bottle of wine at the country club with your friends bragging about your Ferraris and Lamborghinis, and the conversation goes to investments you can't say "oh I just index."  That is what commoners do.  And if you are the money manager for these people you can't just say "oh put it in an index."  That doesn't justify your insane fees, they could just call up Vanguard and pay a fraction of a fraction of those fees to have a professional manager their money with index funds.  No you have to give your super wealthy clients something 'exclusive' that only you can get to justify paying you so much... a meeting with a hedge fund manager.   

If index funds are a used reliable Prius.  Hedge funds are the brand new Bugatti.  Its not about value or efficiency.  Its to show off.
« Last Edit: March 14, 2015, 09:40:06 AM by Indexer »

phillyvalue

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Re: Invest in hedge fund?
« Reply #11 on: March 14, 2015, 09:57:58 AM »
Plenty of cherry-picking and misinformation flying around.

Again, a "hedge fund" is just a particular structure for an investment operation. It is a much better structure than a mutual fund; mutual funds are restricted in their investment opportunities, typically are always open to new money and thus successful ones become way too large to be effectively managed, and typically allow investors to redeem their holdings immediately at any time [instant liquidity is a disadvantage for investors and managers alike].

There is no reason to assume a hedge fund is more risky than a mutual fund or an index fund. Again, they vary so widely in investment strategies that it is impossible to make blanket statements. Canarsie Capital, the fund mentioned above which blew up recently, was (a) highly leveraged, and (b) was invested in highly risky, speculative stocks (social media stocks, other tech, many IPOs, etc). That is a recipe for disaster, but the people invested in that fund knew what the fund was doing and should have known the risks. I would never invest in a fund that utilized leverage to enhance returns or that focused on trading highly speculative stocks, just as I would never do these things on my own. On the opposite end of the spectrum, there are many hedge funds that invest very conservatively and are likely far safer than index funds. I'll throw Baupost Group out there as probably the most conservatively-run fund out there, go read about them if you're interested.

I'm not saying this investment is suitable to the OP. It probably isn't. Most hedge funds worth investing in are closed to new money and would anyway require too large of an investment size for most individuals. Most of their clients are pension funds, endowments, etc. Moreover, I would not invest in a fund if I did not understand their investment strategy or did not have incredible respect for the manager. In addition, I would not invest in a fund dedicated to a particular asset class [i.e., Asian equities] unless I were diversifying among many different funds with different strategies, which is certainly not the case for OP.
« Last Edit: March 14, 2015, 10:01:41 AM by phillyvalue »

Rein1987

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Re: Invest in hedge fund?
« Reply #12 on: March 14, 2015, 10:27:29 AM »
Thanks for all the reply.

I'll stick to my current investment strategy. Maybe one day, when I have multi million dollars, I can try one :) (But I believe I retired much earlier than reaching that asset level...)

LordSquidworth

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Re: Invest in hedge fund?
« Reply #13 on: March 14, 2015, 10:59:59 AM »
A lot of rich people were invested in this hedge fund and had some great returns until the fund hit some hard times: http://en.wikipedia.org/wiki/List_of_investors_in_Bernard_L._Madoff_Investment_Securities

That's what happens when investors don't do their homework. His returns were too good to be true, which is a big flag by itself.

I wouldn't. Assuming you currently have a plan and invest in index funds, stick with that. If you don't, create a plan and stick with it.

Read this article from January: http://www.cnbc.com/id/102356275
Quote
Owen Li, the founder of Canarsie Capital in New York, said Tuesday he had lost all but $200,000 of the firm's capital—down from the roughly $100 million it ran as of late March.

But don't worry, he was sorry.
Quote
A hedge fund manager told clients he is "truly sorry" for losing virtually all their money.

Charlie's pizza store got closed due to rats so we definitely shouldn't visit Joe's pizza store.

Why do you want to gamble on such a risky and high-fee fund?

What fund? OP still hasn't posted the fund.

If you buy a total market index fund you will get the market return and (absent horrific apocalyptic scenarios, where your money would be likely worthless anyway) won't ever lose it all. But with a hedge fund you're paying a bunch of people (making them insanely rich) to gamble with your money. They win even if you lose. You'd have to spend a lot of time monitoring what they were doing (and they probably wouldn't tell you very much detail). If you're going to spend a lot of time looking into investments and want to gamble for a higher return, why not put most of your money in reliable index funds and then gamble with a small amount of it by buying a stock based on analysis of its merits?

^^ Gross generalization based on zero fact.

I've seen an analysis that hedge fund returns are similar to other actively managed fund returns. Once you subtract out their fees, there's no more profit there, or your funds are losing ground to the market.

More gross generalizations. I'll maintain the same theory with hedge fund managers as active fund managers; most of them shouldn't be managing. It's up to the investors to make the individual determinations.

Take everything that is wrong with an actively managed mutual fund, then times it by a hundred, and you get a hedge fund.

^^ Gross generalization.

1.  The fees are insane.  Sometimes you pay over 2% expense ratio plus 20% of profits.  There are countless studies showing that high fees leads to....

http://aquamarinefund.com

No expense ratio, something like 25% of profits, after 4%. So if the fund returns 4% or less, they get paid nothing.

2.  Poor performance.  Hedge funds as a group perform very very badly.  A big thing is the high fees.  They also have performance that is all over the place because...

Individual investors as a group perform horribly. Most people/fund managers shouldn't be managing anything, once more you're grouping the majority with the ones that know what they're doing.

3.  They are all very very different.  Some of them try to 'hedge' by lowering risk using options and short strategies.  A fund like this should do better in a crisis, however thanks to the high fees they rarely do any better than a very conservative mutual fund(something 80% bonds, 20% stocks like VASIX) in terms of risk or returns.  So why not just get the conservative mutual fund?  Some of them try to speculate, they are basically using options and short strategies to bet on the market.  In theory such a fund could have 20% returns in a good year, or in a crisis like 2008.  In practice the manager who can pull that off doesn't appear to exist.  Such a fund is just as likely to have a -20% return in 2008 and then ALSO a -20% return in a good year.  Loads of risk, loads of fees, very little return.  Regular mutual funds don't do this crap because it has shown to be very risky, and this type of behavior is highly regulated which brings me to point #4...

A lot of investments are very, very different from one another. Why everyone needs to do their own research.

4.  They aren't regulated.  This is why they attract the Madoffs of the world.  In theory they can do whatever they want.  Options, shorting, etc.  The fact that they aren't regulated and they can trade with very complex strategies also makes them...

Being able to invest in whatever the manager decides doesn't mean they're not regulated. They're very regulated. Why for the most part they're only for sophisticated investors (which most people aren't, both knowledge wise and financially).

If they're not regulated why does it cost thousands of dollars in government fees and lawyer fees to start one?

5.  Very illiquid.  A hedge fund manager can require that the money stay locked up for at least a year, sometimes longer.  This isn't like a variable annuity where there is a penalty for taking the money out.  The hedge fund is normally organized as a limited partnership with you as a limited partner and the manager as the general partner.  He has 100% control so if he says you can't have your money back yet.... you can't have your money back yet.

That can be a good thing. Liquid pools of money used for investments are not as efficient as illiquid pools for returns.

So your money is invested in this highly illiquid very very expensive investment being managed by a guy who can just about do whatever he wants with it and all the evidence says your money will do worse than just putting it in an index fund with a similar risk profile. 

What evidence? Nobody here knows what fund the OP is even referencing.

Oh, and did I mention the minimum investment in one of these things is normally 1 million?

Hedge funds have shown to be VERY good at making some people rich... the managers.  All the evidence shows they aren't good investments, but they still exist for one reason.  If you are a multi millionaire(10m+) drinking a thousand dollar bottle of wine at the country club with your friends bragging about your Ferraris and Lamborghinis, and the conversation goes to investments you can't say "oh I just index."  That is what commoners do.  And if you are the money manager for these people you can't just say "oh put it in an index."  That doesn't justify your insane fees, they could just call up Vanguard and pay a fraction of a fraction of those fees to have a professional manager their money with index funds.  No you have to give your super wealthy clients something 'exclusive' that only you can get to justify paying you so much... a meeting with a hedge fund manager.   

If index funds are a used reliable Prius.  Hedge funds are the brand new Bugatti.  Its not about value or efficiency.  Its to show off.

So much misinformation... this is tiresome...

Plenty of cherry-picking and misinformation flying around.

Again, a "hedge fund" is just a particular structure for an investment operation. It is a much better structure than a mutual fund; mutual funds are restricted in their investment opportunities, typically are always open to new money and thus successful ones become way too large to be effectively managed, and typically allow investors to redeem their holdings immediately at any time [instant liquidity is a disadvantage for investors and managers alike].

There is no reason to assume a hedge fund is more risky than a mutual fund or an index fund. Again, they vary so widely in investment strategies that it is impossible to make blanket statements. Canarsie Capital, the fund mentioned above which blew up recently, was (a) highly leveraged, and (b) was invested in highly risky, speculative stocks (social media stocks, other tech, many IPOs, etc). That is a recipe for disaster, but the people invested in that fund knew what the fund was doing and should have known the risks. I would never invest in a fund that utilized leverage to enhance returns or that focused on trading highly speculative stocks, just as I would never do these things on my own. On the opposite end of the spectrum, there are many hedge funds that invest very conservatively and are likely far safer than index funds. I'll throw Baupost Group out there as probably the most conservatively-run fund out there, go read about them if you're interested.

I'm not saying this investment is suitable to the OP. It probably isn't. Most hedge funds worth investing in are closed to new money and would anyway require too large of an investment size for most individuals. Most of their clients are pension funds, endowments, etc. Moreover, I would not invest in a fund if I did not understand their investment strategy or did not have incredible respect for the manager. In addition, I would not invest in a fund dedicated to a particular asset class [i.e., Asian equities] unless I were diversifying among many different funds with different strategies, which is certainly not the case for OP.

Someone understands them!

TreeTired

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Re: Invest in hedge fund?
« Reply #14 on: March 14, 2015, 11:21:32 AM »
Someone much wiser than me said:    Hedge Funds are a compensation scheme masquerading as an asset class.  Every IVY League MBA dreams about running a hedge fund.  What beats earning 2% of $10 billion every year?   Plus 20% of the profits if you get real lucky!    Most hedge funds are run be either crooks or coin flippers (or both) .  Yes, some of the coin flippers make money,  while others blow up.     I love reading posts by hedge fund defenders.   

And btw,  the structure itself (allowing limited disclosure, oversight and reporting)  and the one-sided skewed compensation scheme provides tremendous incentives to take excessive risk, whether through leverage or making risky bets.
« Last Edit: March 14, 2015, 11:23:44 AM by TreeTired »

phillyvalue

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Re: Invest in hedge fund?
« Reply #15 on: March 14, 2015, 11:54:52 AM »
Someone much wiser than me said:    Hedge Funds are a compensation scheme masquerading as an asset class.  Every IVY League MBA dreams about running a hedge fund.  What beats earning 2% of $10 billion every year?   Plus 20% of the profits if you get real lucky!    Most hedge funds are run be either crooks or coin flippers (or both) .  Yes, some of the coin flippers make money,  while others blow up.     I love reading posts by hedge fund defenders.   

And btw,  the structure itself (allowing limited disclosure, oversight and reporting)  and the one-sided skewed compensation scheme provides tremendous incentives to take excessive risk, whether through leverage or making risky bets.

Regarding your second point, regulators requiring significant disclosure/oversight/reporting makes a lot of sense when you have a vehicle that a wide range of unsophisticated individuals may invest in, such as a mutual fund. There is reason to think that "big brother" should protect mom and dad who have a $50K net worth and don't have the capacity to understand / evaluate investments. There is far less reason that the government should be stepping in to protect Harvard and its $30B endowment from making poor investment decisions.

Indexer

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Re: Invest in hedge fund?
« Reply #16 on: March 14, 2015, 12:02:22 PM »
Lets look at actual returns. 
Hedge fund returns source:  http://www.hennesseegroup.com/indices/

Hedge Fund(as a group) Returns by year:
2014: 1.5%
2013: 12.86%
2012: 6.99%
2011: -4.66%
2010: 9.89%
2009: 25.21%
2008: -19.83%

Average: 4.57%   Standard Deviation(Risk):  14.25%  Sharpe Ratio(using 0.1% as risk free rate):  0.3137

S&P 500 / Returns over Hedge Funds
2014: 13.39% +11.89%
2013: 32.39% +19.53%
2012: 16.00% +3.14%
2011: 2.11%   +6.77%
2010: 15.06% +5.17%
2009: 26.46% +1.25%
2008: -37.00% -17.17%

Average: 9.77%  +5.20%  Standard Deviation: 22.79%  (1.6 times more risk than Hedge Funds)  Sharpe: 0.4243

And so someone doesn't say its not fair to compare to the S&P 500 since it is more risky lets compare to a conservative 80% bond/ 20% stock portfolio like VASIX. 

VASIX / VS hedge fund
2014: 6.76%  +5.26%
2013: 3.4%    -9.46%
2012: 6.54%  -0.45%
2011: 3.77%  +8.43%
2010: 9.22%  -0.67%
2009: 12.08%  -13.13%
2008: -10.53%  +9.3%

Average: 4.46%  -0.11%    Standard Deviation:  7.26%   (51% of the risk of Hedge Funds)  Sharpe:  0.6006

For half the risk level you get almost the exact same returns.  Hedge funds are suppose to give you better risk adjusted returns.  They are suppose to be able to weather the crisis better, but still do good in the good markets.  Clearly a simple conservative balanced fund does that a whole lot better.  Looking at the Sharpe Ratio(a measure of risk VS returns) we see the same thing.  VASIX's Sharpe ratio over this period is almost double the hedge funds because it has nearly the same return and nearly half the risk.

If you want growth than stocks have shown to outperform hedge funds over the long run.  If you want something that will weather a crisis better and give you better risk adjusted returns a balanced fund(even the super conservative) will still normally be a better bet than a hedge fund.

Now I'm sure someone will argue that on average they aren't very good, but oh look this one or that one is amazing!  Well that logic would apply to picking the winning active fund(which people are terrible at), or picking the winning stock(which people are terrible at). 

Quote from: LordSquidworth
http://aquamarinefund.com

No expense ratio, something like 25% of profits, after 4%. So if the fund returns 4% or less, they get paid nothing.

The website(which looks like it something from 1995) requires a log in to see most of the information, but I was able to access the part that talks about fees.  According to the site you linked to you can either pay 33% of returns over 6% OR 25% of returns over 4% PLUS a 1% management fee.  No expense ratio?  ;)

Quote
Individual investors as a group perform horribly. Most people/fund managers shouldn't be managing anything, once more you're grouping the majority with the ones that know what they're doing.

Most people/fund managers shouldn't be managing anything?  I agree, but you are implying that the hedge fund managers "you" picked out are superior.  Show me the fund managers that do prove to outperform over time?  Most of your big active funds are run by experts.  These guys have decades of experience, CFAs, and small armies of analysts along with mountains of data and supercomputers to dig through it.  They also have hundreds of billions or in some cases trillions in assets(American Funds/Fidelity/Vanguard/Blackrock), but they still struggle to outperform.  What makes XYZ Hedge Fund manager so much better than them, regular investors, and other hedge funds?  How do you know in ADVANCE which hedge fund manager will be the best in the future?  Since hedge funds close when they have to much in assets how do you know before everyone else which hedge fund to jump in while they are still open? 

Quote from: LordSquidworth
Being able to invest in whatever the manager decides doesn't mean they're not regulated. They're very regulated. Why for the most part they're only for sophisticated investors (which most people aren't, both knowledge wise and financially).


If they're not regulated why does it cost thousands of dollars in government fees and lawyer fees to start one?

That might be the first time I've ever heard(read) someone say hedge funds are very regulated.  They are only for sophisticated investors... technical term "accredited investors" because if you ONLY have accredited investors and institutional investors you get to avoid a lot of the SEC regulations.  Accredited investors are normally defined as people with over 1 million in investable assets.  Hedge funds normally have 1 million minimum investment so that only accredited investors can join them.  Hedge funds are not regulated like other investment companies, and having a 1 million dollar minimum helps them stay that way.  "Accredited investor" is based on net worth more than anything else, your actual knowledge has nothing to do with the term. 

Read up on Regulation D, 506c exemption.  If they get an exemption they don't have to register with the SEC. 

It costs thousands of dollars to set them up because they are normally organized as big limited partnerships.  Investors are the limited partners, and the manager is the general partner bound together by hundreds of pages of legal documents.  They also spend loads of money on attorneys to make sure they are set up right and in many cases so they can avoid registration with the SEC.  In terms of investing, oversight, and sales practices they are largely unregulated. 

Quote from: LordSquidworth
Why everyone needs to do their own research.

P.S.   The fund you linked.... has a 1% management fee you didn't know about.  Maybe more research is required. 

Things worth researching before investing in a hedge fund:  Regulation D, rule 506c.  Accredited Investor.  Whether the hedge fund has custody of your assets.  Do a brokercheck on all the managers.   If they are unregistered with the SEC, AND they have custody of your assets... it might be fine... but if it was Madoff you would have no way of knowing till it was too late.
And read:  http://www.investopedia.com/university/hedge-fund/characteristics.asp
« Last Edit: March 14, 2015, 12:18:17 PM by Indexer »

hodedofome

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Re: Invest in hedge fund?
« Reply #17 on: March 14, 2015, 02:25:46 PM »
Nobody can invest in the entire hedge fund world, so comparing the returns of the entire group to anything is ridiculous. Every fund has to be researched on its own merit.

LordSquidworth

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Re: Invest in hedge fund?
« Reply #18 on: March 14, 2015, 04:14:46 PM »
Lets look at actual returns. 
Hedge fund returns source:  http://www.hennesseegroup.com/indices/

Hedge Fund(as a group) Returns by year:
2014: 1.5%
2013: 12.86%
2012: 6.99%
2011: -4.66%
2010: 9.89%
2009: 25.21%
2008: -19.83%

Average: 4.57%   Standard Deviation(Risk):  14.25%  Sharpe Ratio(using 0.1% as risk free rate):  0.3137

S&P 500 / Returns over Hedge Funds
2014: 13.39% +11.89%
2013: 32.39% +19.53%
2012: 16.00% +3.14%
2011: 2.11%   +6.77%
2010: 15.06% +5.17%
2009: 26.46% +1.25%
2008: -37.00% -17.17%

Average: 9.77%  +5.20%  Standard Deviation: 22.79%  (1.6 times more risk than Hedge Funds)  Sharpe: 0.4243

And so someone doesn't say its not fair to compare to the S&P 500 since it is more risky lets compare to a conservative 80% bond/ 20% stock portfolio like VASIX. 

VASIX / VS hedge fund
2014: 6.76%  +5.26%
2013: 3.4%    -9.46%
2012: 6.54%  -0.45%
2011: 3.77%  +8.43%
2010: 9.22%  -0.67%
2009: 12.08%  -13.13%
2008: -10.53%  +9.3%

Average: 4.46%  -0.11%    Standard Deviation:  7.26%   (51% of the risk of Hedge Funds)  Sharpe:  0.6006

For half the risk level you get almost the exact same returns.  Hedge funds are suppose to give you better risk adjusted returns.  They are suppose to be able to weather the crisis better, but still do good in the good markets.  Clearly a simple conservative balanced fund does that a whole lot better.  Looking at the Sharpe Ratio(a measure of risk VS returns) we see the same thing.  VASIX's Sharpe ratio over this period is almost double the hedge funds because it has nearly the same return and nearly half the risk.

See:

Nobody can invest in the entire hedge fund world, so comparing the returns of the entire group to anything is ridiculous. Every fund has to be researched on its own merit.

Quoting wide ranging statistics all day long is meaningless.

That's like saying whats the point of your ravenous hyping of indexing when retail investors see an average return of 2.3%. Just like the masses shouldn't be managing money, a majority of all fund type managers shouldn't be managing money.

Therefor your statistics are fundamentally flawed. If an investor does due diligence, he should be able to avoid those masses that shouldn't be managing money and therefor negate your statistics.

The website(which looks like it something from 1995) requires a log in to see most of the information, but I was able to access the part that talks about fees.  According to the site you linked to you can either pay 33% of returns over 6% OR 25% of returns over 4% PLUS a 1% management fee.  No expense ratio?  ;)

Oh boo hoo it's only been years since I peaked. My bad.

Most people/fund managers shouldn't be managing anything?  I agree, but you are implying that the hedge fund managers "you" picked out are superior.  Show me the fund managers that do prove to outperform over time?  Most of your big active funds are run by experts.Self proclaimed  Decades doesn't mean anything if you're a herd follower, which a lot of funds are these days. These guys have decades of experience, CFAs, and small armies of analysts along with mountains of data and supercomputers to dig through it. A lot of great investors don't employ CFA's, they're a product of wall street just like the supercomputers that bombard you with info. These same ones also tend to not have their offices anywhere near wall street.  They also have hundreds of billions or in some cases trillions in assets(American Funds/Fidelity/Vanguard/Blackrock), but they still struggle to outperform.Because the bigger a fund gets the harder it is to make money with. This is a pretty commonly known thing. Can't steer a yacht like a speed boat.  What makes XYZ Hedge Fund manager so much better than them, regular investors, and other hedge funds?  How do you know in ADVANCE which hedge fund manager will be the best in the future?  Since hedge funds close when they have to much in assets how do you know before everyone else which hedge fund to jump in while they are still open?
 



Indexer

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Re: Invest in hedge fund?
« Reply #19 on: March 14, 2015, 05:59:15 PM »
LordSquidworth:

I just want to make sure we are on the same page.  When people originally said hedge funds were a bad investment you said we were making "^^ Gross generalization(s) based on zero fact."  So I gave facts, lots of them. 

Now the argument is that facts like historical data of actual returns, evidence of how hedge funds avoid regulation, and statistical analysis are meaningless.  In addition the professionals who do this for a living are all unqualified except for a few of the guys who run hedge funds.

Are we just expected to take your word for it that hedge funds(at least some of them) are good investments without any evidence to back it up when there is clearly an overwhelming degree of evidence to the contrary? 

You keep saying we need to do the research and pick the "good" hedge funds.   So answer me one question that I already asked(and that you even quoted in your previous post).
"What makes XYZ Hedge Fund manager so much better than [other professionals], regular investors, and other hedge funds?  How do you know in ADVANCE which hedge fund manager will be the best in the future?  Since hedge funds close when they have to much in assets how do you know before everyone else which hedge fund to jump in while they are still open?"

waltworks

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Re: Invest in hedge fund?
« Reply #20 on: March 14, 2015, 06:49:02 PM »
I'll manage your money in exchange for only 1/2% and 10% of profits. And I'll just stick it in some 50/50 Vanguard fund, you're virtually guaranteed to beat 90% of hedge funds, and for half the price!

-W

LordSquidworth

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Re: Invest in hedge fund?
« Reply #21 on: March 14, 2015, 08:35:52 PM »
LordSquidworth:

I just want to make sure we are on the same page.  When people originally said hedge funds were a bad investment you said we were making "^^ Gross generalization(s) based on zero fact."  So I gave facts, lots of them. 

You gave more sweeping generalizations.

Again lumping all hedge funds, just like lumping all managed funds, into your statistics doesn't paint a correct picture of all the funds out there.

Now the argument is that facts like historical data of actual returns, evidence of how hedge funds avoid regulation, and statistical analysis are meaningless.  In addition the professionals who do this for a living are all unqualified except for a few of the guys who run hedge funds.

Your data is based on far too broad of categories.

Outlined in another thread, there have been two significant changes to the S&P 500 index alone since 2000.

If you want to be a true data miner, those changes negated your historical returns.

It should be no secret a lot of the managers out there shouldn't be managing. As much as people like to think these sort of investments are primarily there for die-hard investors, the industry by and large is still heavily salesman centric. The requirements to get securities licenses are laughable.

Are we just expected to take your word for it that hedge funds(at least some of them) are good investments without any evidence to back it up when there is clearly an overwhelming degree of evidence to the contrary?

Supposed to do your own research.

Are we just supposed to take your word indexing is the greatest thing on earth?

Again, your evidence is too broad and general.

You keep saying we need to do the research and pick the "good" hedge funds.   So answer me one question that I already asked(and that you even quoted in your previous post).
"What makes XYZ Hedge Fund manager so much better than [other professionals], regular investors, and other hedge funds?  How do you know in ADVANCE which hedge fund manager will be the best in the future?  Since hedge funds close when they have to much in assets how do you know before everyone else which hedge fund to jump in while they are still open?"

A hedge fund closing to new investors has nothing to do with how well it's doing. It's done to keep the money pool manageable. Part of the reason many of the largest active funds lag the market is because they're simply too big. When it comes to steering money pools towards profits one can either be the barge (too much money - slow to react - cumbersome) or they can be the doctors scalpel (smaller pool of money - easier to move around).

and again, everyone can do their own research. I don't recommend individual investments or tell people specifically how to find them.

** If anyone has to go online to ask if they should invest in hedge funds, they probably shouldn't be investing in hedge funds is the most specific I'll be.**

I'll manage your money in exchange for only 1/2% and 10% of profits. And I'll just stick it in some 50/50 Vanguard fund, you're virtually guaranteed to beat 90% of hedge funds, and for half the price!

-W

Your path to billions. The hardest part is getting the money from other people.
« Last Edit: March 14, 2015, 08:45:11 PM by LordSquidworth »

hodedofome

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Re: Invest in hedge fund?
« Reply #22 on: March 14, 2015, 09:49:06 PM »


** If anyone has to go online to ask if they should invest in hedge funds, they probably shouldn't be investing in hedge funds is the most specific I'll be.**

I was gonna say the exact same thing. Sums up the best response to the original question.

waltworks

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Re: Invest in hedge fund?
« Reply #23 on: March 14, 2015, 10:32:21 PM »
To be fair, I think you could say, about almost ANY investment query posted:
1. Poster probably doesn't have a new or unique question and could have found many discussions of the topic here or elsewhere. Hence:
2. Poster is hence unwilling/able to do their own legwork AND interested in the opinions of anonymous strangers. Hence:
3. Poster should stay the hell away from anything more complex than a basic asset allocation and indexing because they are either criminally lazy or unbelievably naive about the internet and how to use it, or both.

-W



** If anyone has to go online to ask if they should invest in hedge funds, they probably shouldn't be investing in hedge funds is the most specific I'll be.**

I was gonna say the exact same thing. Sums up the best response to the original question.

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arebelspy

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Re: Invest in hedge fund?
« Reply #25 on: March 15, 2015, 10:13:29 AM »
http://www.nytimes.com/2015/03/15/your-money/how-many-mutual-funds-routinely-rout-the-market-zero.html

Interesting study.

That was amazing, and probably deserves its own thread.

EDIT: Looks like someone started one: http://forum.mrmoneymustache.com/investor-alley/how-many-mutual-funds-routinely-beat-the-market/


Quote
And for the 2,862 funds as a whole, that record is even a little worse than you would have expected from random chance alone.


In other words, if all of the managers of the 2,862 funds hadn’t bothered to try to pick stocks at all — if they had merely flipped coins — they would, as a group, probably have produced better numbers.

You just can't beat the market in real life.  It totally seems like you can, but none of these funds/managers do.
« Last Edit: March 15, 2015, 10:15:05 AM by arebelspy »
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hodedofome

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Re: Invest in hedge fund?
« Reply #26 on: March 15, 2015, 12:48:05 PM »
Using mutual funds (a bad vehicle to begin with) from a poorly done study to prove that the market can't be beat is bad form IMO.

Who cares what the best funds were in 2009. You're gonna make a conclusion based on the best performers in one year and how those funds did over the next 5?

waltworks

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Re: Invest in hedge fund?
« Reply #27 on: March 15, 2015, 01:06:24 PM »
I would like to see more of the guts of that study too but the conclusion has plenty of statistical power and is quite damning - if you are coming in well *below* what would be expected in a normal distribution...with thousands of funds involved?

Even if it's just a 5 year period, that would be enough, statistically speaking, to draw some pretty strong conclusions.

-W

Using mutual funds (a bad vehicle to begin with) from a poorly done study to prove that the market can't be beat is bad form IMO.

Who cares what the best funds were in 2009. You're gonna make a conclusion based on the best performers in one year and how those funds did over the next 5?

hodedofome

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Re: Invest in hedge fund?
« Reply #28 on: March 15, 2015, 01:09:46 PM »
The problem is that they only took the best performers in 2009 and then compared their performance for the next 5 years, so they left out a lot of funds, what if the best funds over the 5 years had a bad 2009? They wouldn't be included in the study. Seems odd that they would do this.

In the end if we're talking about active mutual funds then it doesn't really matter. Those are pretty much all bad across the board. Very few good managers would be in a mutual fund. The best start hedge funds.

Indexer

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Re: Invest in hedge fund?
« Reply #29 on: March 15, 2015, 01:16:50 PM »
Are we just expected to take your word for it that hedge funds(at least some of them) are good investments without any evidence to back it up when there is clearly an overwhelming degree of evidence to the contrary?

Supposed to do your own research.

Are we just supposed to take your word indexing is the greatest thing on earth?

Again, your evidence is too broad and general.

I did do my own research, and the conclusion was that a basic balanced fund is going to be better than a hedge fund the vast majority of the time.  Even if you want something that can hedge and protect you on the downside... balanced fund is still normally a better route.

You don't have to take my word for index funds being great because I haven't actually endorsed index funds in this topic. I've stayed focused on the topic at hand; hedge funds.

I agree one probably shouldn't be giving exact recommendations over the internet.  I'm just looking for ANY evidence that hedge funds are more than a fluke.  There are a 'few' hedge funds with good performance, but I don't believe there is actually a method for picking them out from the herd.  They are highly unregulated, they don't have to register with the SEC, and they aren't very transparent.  That means the information that is normally available for comparing stocks or mutual funds isn't as available for hedge funds.  You can see past returns.  You can listen to the manager talk.  Thats about it.  If people are horrible at picking stocks and active funds why would they be any better with hedge funds?  I asked you to give evidence of how you would pick a winning hedge fund in advance because I didn't believe it can actually be done reliably.  I think hedge fund outperformance is like bigfoot.  Occasionally you find a footprint or a fuzzy picture(a random fund that outperforms), but there isn't any concrete evidence to back it up. 

http://www.nytimes.com/2015/03/15/your-money/how-many-mutual-funds-routinely-rout-the-market-zero.html

Interesting study.

+1   If you want an endorsement for just using an index fund.  There is it.

hodedofome

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Re: Invest in hedge fund?
« Reply #30 on: March 15, 2015, 01:23:15 PM »
So I'm not gonna act like I have a quantifiable way to determine which hedge fund to invest in. But I can give you some things to watch out for and weed out the bad ones, if you can eliminate the bad ones, that'll get you pretty far.

1) is the fund structured so that it commingles everyone's money or is it a separate account in your name? Commingling allows someone like Bernie Madoff to do what he did. Separate accounts are ones in your name but the manager has trading authority over it. You can see how much money is in the account whenever you want. If they are stealing, you'll know it.

2) never write a check to someone. Only write checks to a bank. You don't write a check to George Soros or Quantum Fund, you write a check to JP Morgan bank or something like that. JP Morgan is supposed to make sure your money never gets messed with.

3) is there a lockup period? Meaning is there a set amount of time you can't pull your money out?

4) is the fund invested in illiquid stuff? How easily will it be to sell those things in a crisis? If you'll need your money during a crisis don't invest in funds like this!

5) is the fund leveraged? If so by how much?

6) what's the fund manager's golf handicap? This is not a joke. A fund manager who is a scratch golfer is probably caring more about his golf game than his funds performance. There's a number in every manager's head that tells him 'I've made enough money, now it's time to achieve something else." Although you can't know what that number is, you can tell by how they spend their time.

7) time to go, I'll fill in the rest later :)

waltworks

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Re: Invest in hedge fund?
« Reply #31 on: March 15, 2015, 01:24:04 PM »
The question is just if some consistently outperform. For that question, the study is just fine - if you had invested in a "good" mutual fund in 2009, you'd have done a little worse than picking stocks from a hat. If 2009 is somehow unique, I would be surprised, but you never know.

-W

The problem is that they only took the best performers in 2009 and then compared their performance for the next 5 years, so they left out a lot of funds, what if the best funds over the 5 years had a bad 2009? They wouldn't be included in the study. Seems odd that they would do this.

In the end if we're talking about active mutual funds then it doesn't really matter. Those are pretty much all bad across the board. Very few good managers would be in a mutual fund. The best start hedge funds.

DavidAnnArbor

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Re: Invest in hedge fund?
« Reply #32 on: March 15, 2015, 01:27:23 PM »
  Show me the fund managers that do prove to outperform over time? 

http://www.nytimes.com/2015/03/09/your-money/a-mystery-in-hedge-fund-investing.html

Writer and financial planner Carl Richards reiterates what Indexer is saying.