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).
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? ;)
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?
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.
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