by John Reizner
Hedge funds have become a fad on Wall Street these days. Many banks, including one where I have my money, are rushing to say that hedge funds should be in many wealthy investors' portfolios, as an "alternative" investment that can balance out your portfolio. The sellers of such investments say that in a general market swoon one's overall portfolio losses might be partially mitigated by profits from the hedge fund's short holdings, if there are any. I will say however, that most fads end badly.
Hedge funds are investment vehicles which employ strategies in the financial markets such as betting on the both the rise or decline of equities (long and short positions), option strategies, derivatives, debt securities, or any position which the manager believes may be profitable. There is often with these vehicles an emphasis and a culture of short-term and ultra short term investment, which may be inherently riskier. Hedge fund managers often employ complex methods to increase the likelihood of achieving a high return on investment, but often involve assuming greater risk. Managers sometimes use leverage to attempt to increase their returns.
The four reasons not to invest in hedge funds are the following:
Reason number one: high fees siphon away a chunk of your profit. Hedge funds may charge as many of three different types of fees on your investment dollars. There may be an initial sales charge which would take out a percentage, for example, 4%, of your investment dollars as the cost of entry or sales compensation. Second, there may be a management fee, which might be 2% for example, which is to cover the running of the fund. Third, there is usually a performance fee incentive, often 20% of your profits, which goes to the manager. It is no wonder with all these high fees, that many banks and individuals are so high on hedge vehicles. In fact it is a conflict of interest when the individual manager or bank offers these funds as a fee-earner for them rather for the benefit of the investor.
Reason number two: hedge funds often employ leverage, using borrowed money, to invest in order to increase the returns to their investors. Of course, using borrowed money to invest can work against you - should the funds positions go sour, then losses are increased.
Reason number three: the performance of hedge vehicles is not as great as generally thought after you consider the hedge fund failure rate. There may be many well-run hedge funds, though no one is immune from failure or closure due to poor performance. Julian Robertson, a top level and eminent operator, closed his fund after holding onto positions that went against him as the millennium bear market burst the technology bubble of the late 1990's. Spectacular hedge fund failures such as Long Term Capital Management and more recently Amaranth, illustrate the speed and extent of capital loss that can occur in such investment vehicles. You can literally wake up one morning with your profits gone or showing deep losses. Do you want to take that risk? However, many funds close down because the operators do not want to continue running the business. Also, some operators may not be able to attract enough money, and close down.
Reason number four: Hedge funds often have a short term time horizon. I have always believed trading with a very short term outlook, often intraday, is highly speculative. I believe there are only a small number of managers savvy enough to make investing in a hedge vehicle with such time horizons worthwhile. Why take unnecessary risk with earning a half point in a day, or not, with borrowed money, when one can more reasonably invest in select equities or mutual funds that may multiply your original investment many times over the long term?
If you wish to explore a longer term investment technique, please visit my website at http://www.reiznersway.com/, where you may purchase my ebook, A Way to Wealth - The Art of Investing in Common Stocks.
This article contains the opinions and ideas of its author and is designed to provide useful information to the reader on the subject matter covered. The author may or may not have current positions in the investments mentioned in this work, and the author may from time to time make investments in a manner that is not described here. Past performance is no guarantee or prediction of future results and any investments made, based on the opinions and ideas contained in this work, may or may not be successful. The strategies contained herein may not be suitable for every situation, and the author is not engaged in rendering legal, accounting, investment advisory or other professional services.
About the Author:
I was first exposed to financial markets when I started reading the stock quotes out of the newspaper to my businessman grandfather, who was legally blind, when I was about ten. My current e-book, A Way to Wealth - the Art of Investing in Common Stocks, is available at my website, http://www.reiznersway.com/
Article Source: http://www.goarticles.com/cgi-bin/showa.cgi?C=429055
http://www.m-money.info
Make Money Online Directory and Resources.
Make Money Online Directory and Resources.
No comments:
Post a Comment