I know, I know, what you've REALLY been waiting for me to write about is what you should do with that extra million dollars you've got burning a hole in your pocket. Well, that's probably enough to meet the minimums of many hedge funds, so that means you should be able to access some of the most highly skilled investment managers money can buy. Yes, you too can belong to that exclusive club of those who enjoy gloriously superior investment performance with minimal risk, by taking advantage of all those exciting hedging strategies like short selling and derivative trading. And it's fun to tell people. "I own a multi-strategy hedging portfolio". Watch yourself saying it to the mirror.
It's so good to know that whether the stock market overall goes up, down or sideways, your brilliant hedge fund manager will still find ways to make you money. He isn't tied to any of those tired, old fashioned, conventional investment strategies and restrictive reporting regulations that limit the gains of other funds. He's free to do what it takes to get the job done. The only bummer is that you often have to say goodbye to your money during a five year lock up period. Well, that and the fact that in the last couple of years hedge funds have made a lot less money for their investors than super cheap index funds available to everyone through any discount broker.
Yeah, sorry, it's true.
In 2011 the average hedge fund actually lost 5%, which would only have been about $50,000 for every one of your millions. But this year hedge funds made money. The average hedge fund is up about 4.5% so far this year (but of course, you'd have to reduce that return by the 2% management fee and the 20% performance fee on the gains to get the real return). Then there's the tax bill that comes after all that trading…
Sure, you could just invest in a market tracking etf, since the S&P 500 is up about 15% so far this year, and nearly 26% since last year, and that's without even adding in the dividends, but you're not into chasing returns, because that's for the less sophisticated investors and the greedy. And investors who are paying like 0.05% in management fees on their boring old etf will never get that special feeling you have as a hedge fund investor, and they won't be invited to fancy annual dinners with the other wealthy investors who aren't getting very good returns.
Putting your money in an S&P 500 tracking etf would be so unimaginative, so it's really just not worth the $260,000 in gains you could have had. And there's nothing more boring than a U.S. treasury fund, even if they have returned about 7% this year, and nearly 23% in the last year for a management fee of 0.15%. Not the right investment for you. And if you pulled your money out of your hedge fund (as people have been doing in droves over the last few months) the fund might end up closing down (as nearly 20% of hedge funds do each year). And then people might lose jobs, and jobs are hard to find these days. Could you really live with yourself if your greed caused someone to lose his job? What about his house in Connecticut? If he lost his job and his house, the state would lose important property tax revenue. And if he pulled his kids out of private school, stopped buying fancy things and stopped contributing so generously to his religious and social institutions, then several other businesses might really be in trouble, and many more people might suffer. No, in these challenging economic times, it would be wiser to forgo decent returns and not destroy the livelihood of so many people.
Don't get me wrong, I'm not arguing with Simon Lack's assertion that between 1998 and 2010 hedge fund investors gained about 2.1% or $70 billion, while managers made about $379 billion, or that managers made hundreds of millions in fees while their investors actually lost money. I wouldn't argue with that, and I also wouldn't tell you how you should feel about that. You're an adult. Maybe you're ok with it.
Sure, for the most part, hedge funds underperform, are under-regulated and they charge obscenely high fees. So what? Privilege has it's price, right? And it's not any one's business if you happen to be a very kind person who cares more about the well-being of your hedge fund manager than about getting a substantially better investment return.
