The hedge fund industry may promise top returns in all market conditions, but often a well balanced portfolio of international and US stocks and bonds can deliver similar results for less money, a study released on June 06 shows.
Over the last six years, a diversified portfolio of stocks and bonds earned an average annual return of 6.3 percent, slightly more than the 5.2 percent return delivered by so- called hedge funds of funds, Presidio Financial Partners, a company that offers financial advice to wealthy clients, found.
Results for a longer period from January 1990 to March 2006 found a similar trend, the San Francisco-based firm said.
"The point is that as hedge funds become more popular, investors need to proceed with caution," said Jeff Spears, managing director of Presidio Financial Partners and also head of the company's investment consulting business.
Hedge funds are lightly regulated investment pools that can use trading techniques such as selling stocks short that are often off limits at mutual funds to try to make money in all markets. They can employ complicated trading strategies and, as an industry, earned a reputation for delivering out-sized returns in the 1990s.
But recently, as more managers flooded into the fast growing $1.2 trillion hedge fund industry, where assets have doubled in the last five years, industry analysts warned that not all hedge fund managers could deliver the huge returns that have made some managers famous and their clients wealthy.
Presidio used data from consulting group Hedge Fund Research's funds of funds index to compile its study.
As hedge funds became more popular many investors have gravitated to so-called funds of funds where managers build a portfolio of hedge funds that minimises the investment risk.
But Presidio warned that these types of expensive investments can often have pitfalls.
While hedge funds can make money quickly, they can also lose it quickly because many use leverage.
Hedge funds of funds are very pricey because the client pays two sets of fees - the funds of funds manager and the underlying hedge funds' performance and management fees.
Most traditional money managers charge only management fees and no performance fees.
In its research, Presidio said its consultants found that only 12 to 15 of the more than 1,000 funds of funds and no more than 250 of the more than 8,000 individual hedge funds deliver the kind of performance to justify their fees.
Most hedge funds of funds have a few anchor managers, but the quality of the other managers in the portfolio is "often mediocre or poor," the consultants found. Also hedge funds of funds managers often do not have enough promising new managers available to replace those who are not performing well.
The consultants also wrote that most hedge funds of funds personnel "lack the sophistication to comprehend complex hedge fund strategies and instead gravitate to easy-to-understand strategies."
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