Are The Rewards Of Hedge Fund Investing Worth The Risk?

The fact that investment managers present hedge fund investing as all reward and no risk should give pause to any thoughtful investor. In fact, a study done by Barclays Capital found that hedge fund returns tend to be exaggerated by up to 6 percent (mostly due to survivorship bias). They are made to look very good on paper, but when the real numbers are added up, the truth is revealed. By the time there are real numbers to work with, it is too late to choose another vehicle; the money is already committed. When the true returns are compared with other investments, it becomes apparent that the diligent investor might do better by investing in more conventional mutual funds and rejecting the hedge fund investments.

There are several ways that those who present the performance figures for hedge fund investments can shroud the negative effects of fees and commissions. One example is to omit products that have failed from the calculations. This improves the apparent performance of the ones that remain. The best hedge funds are generally accompanied by the lowest management fees.

Much of the profit produced by the underlying stocks is diverted into the fees and commissions collected by the management company. When considering stock shares, the salaries of the board of directors and the entire management chain can be thought of as management fees against shares. When stocks are bought by a hedge fund investment company, the fees are compounded, which does not leave much of the profit made by the underlying companies for the investor.

Other investments, such as index funds, require much less management and far fewer fees. Since the drag of fund costs compound much the same as investment returns, the wealth lost to high-cost investment options such as hedge funds and actively-managed mutual funds can reach astronomical levels over the course of a lifetime.

The benefits of hedge fund investing are much greater for the managers than for the investor, and this fact is often skillfully hidden in the numbers. It benefits the unemployment situation by keeping fund managers in a job, often at the expense of the investor. More profit will trickle down to the individual that actually funds all of this when investments are made in vehicles with the least management expense.