Tags: investing | stocks | hedge fund | bonds

Investors Flock to Hedge Funds Despite Mediocre Performance

By    |   Monday, 02 March 2015 06:20 AM

Hedge funds haven't performed well recently, but investors are pouring in money anyway, drawn in by the allure of low risk and high returns.

The Barclays Hedge Fund Index returned a paltry 2.9 percent last year, compared to 13.7 percent for the Standard & Poor’s 500 index and more than 5 percent for the Barclays U.S. Aggregate Bond Index.

Hedge funds aren't looking so good for the long term either. Over the past 10 years, they returned 5.6 percent, while a 60 percent-stocks/40 percent-bond portfolio returned 6.6 percent.

Still, hedge funds saw an inflow of more than $88 billion in 2014, putting their assets are more than $3 trillion, according to investment consulting firm eVestment.

So why do investors continue diving into hedge funds?

"That is a testament to hedge fund marketing and a sales pitch that, stripped of its often technical jargon, promises what has always been the holy grail of investing: higher returns with lower risk," writes New York Times columnist Jim Stewart.

"Some hedge funds go so far as to promise higher returns with what is essentially zero risk — something, it seems worth noting, that has never been achieved in human history."

To be sure, it can be argued that at least some hedge funds are doing their job in reducing risk. To reduce risk, the funds should underperform in bull markets, as they are now, and overperform in bear markets, as they did in 2008.

Stewart isn't the only one with healthy dose of skepticism about hedge funds. Henry Blodget, editor-in-chief of Business Insider, offers a harsh assessment of them on the news service.

"On average, hedge funds are no smarter about picking stocks or other investments than anyone else. In fact, they're decidedly, startlingly worse," he writes. "But hedge funds are absolutely brilliant moneymaking opportunities for those who run and work for them," thanks to their high fees.

Hedge fund managers generally charges investors 2 percent of assets, plus 20 percent of profits above a pre-set threshold.

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Hedge funds haven't performed well recently, but investors are pouring in money anyway, drawn in by the allure of low risk and high returns.
investing, stocks, hedge fund, bonds
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2015-20-02
Monday, 02 March 2015 06:20 AM
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