December 10, 2013

What is a Hedge Fund?

Doug Kass, says of hedge funds, “they take uncommon risks for common returns.” (His article, “Profiling the 2006 – 07 Bear Market,” appeared on, 08/07/06.) In other words, many hedge funds do not outperform other investments, or generate solid returns with lower risk. If you look at hedge fund performance during the most recent financial crisis, most did poorly. Not only did they not make money in a dismal market, many lost money – in some cases a lot!

That is not to say there aren’t great hedge fund managers out there who can add value to your portfolio. But I suggest they are few in number and difficult to evaluate. Like finding gold, is the success of a hedge fund the result of skill or luck? Some managers are truly skillful, but how can we establish that? When it comes to investment returns, what was bestowed by good luck can just as easily be taken away by bad luck!

Therefore, let the buyer beware.