Market Beat: Hedge funds did not have a good year
TRUCKEE, Calif. andamp;#8212; Hedge funds once were investments only available to the wealthiest of investors. To qualify to invest in a hedge fund, you had to be an andamp;#8220;accredited investor,andamp;#8221; which means that excluding your house you had to be a millionaire.Today, through ETFs, hedge funds are available to the public. Currently there are 11 ETFs that are hedge fund replications or andamp;#8220;funds of fundsandamp;#8221; andamp;#8212; that is they offer several different hedge fund managers within one fund.Because hedge funds were originally for wealthy investors, they are subject to different scrutiny from the regulators than investments marketed to the general public, like mutual funds and annuities. Now that ETFs have made hedge fund investing accessible to small investors, the public needs to understand their reporting standards, expenses and performance before investing in them.The expenses of hedge funds have long been high, though it can vary from fund to fund, a 2 percent fee, plus 20 percent of the profits are common. High fees can be justified if the returns are there, but if the returns are not too good; the high fees can be a real drag on performance.Last year, in 2011 hedge funds overall did not have a very good year. The average fund lost 4 percent, making it the 2nd worst year in the industryandamp;#8217;s history. Legendary investor John Paulsonandamp;#8217;s Advantage Plus fund was down a whopping 52.5 percent.To make matters worse for the industry, recent research suggests that some hedge funds may be misreporting their quarterly returns to the Securities and Exchange Commission.In a presentation at the American Finance Associationandamp;#8217;s annual meeting in Chicago last month, several academics presented research that shows that andamp;#8220;roughly 150,000 of the 2.3 million disclosed positions they looked at andamp;#8212; about 7 percent andamp;#8212; showed valuations that deviated from quarter-end closing prices,andamp;#8221; and that, andamp;#8220;for a quarter of the hedge fund companies they examined, there at least some deviations that were economically significant.andamp;#8221;What appears may be common practice among hedge funds is to misreport the prices of the stocks that they hold deliberately to make their performance seem to be better.The Financial Times recently reported on new research by three academics that concludes that, andamp;#8220;the average excess returns of hedge funds does not differ markedly from zero.andamp;#8221;In other words overall, they say that hedge funds are not delivering risk adjusted returns above market returns. As always, use caution and do your homework when considering any investments.Kenneth Roberts is a Truckee based Registered Investment Advisor. Ken has been in the securities business since 1992, has worked as a branch manager for a major Wall Street firm, and is currently a portfolio manager for Fusion Asset Management who specializes in target retirement and income producing portfolios. Information on his money management service can be found at http://www.fusiontargetretirement.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser-before purchasing any security.