· Listen
A hedge fund is an actively managed investment pool that uses strategies more complex than just buying stocks and bonds. Despite the mystique, the average hedge fund has underperformed a simple S&P 500 index fund over the past 15 years.
What 'hedge' actually means
Originally, the term referred to using short positions to hedge (offset) long positions. Today, hedge funds use a wide range of strategies: long/short equity, global macro, distressed debt, merger arbitrage, quant trading, and many others. Most don't 'hedge' in the original sense at all.
Who can invest
Generally limited to accredited investors (people with $200K+ income or $1M+ net worth excluding their home), and minimum investments are typically $250,000 to $1 million. Some funds require $5M+.
The famous fees
'Two and twenty' is the classic structure: 2% of assets per year plus 20% of profits. Some elite funds charge more (3 and 30). These fees compound brutally. To beat a simple index fund net of fees, the manager needs to outperform by ~5% per year before fees, which most fail to do.
The dispersion problem
Hedge fund returns vary enormously. The top funds genuinely produce excellent risk-adjusted returns. The bottom funds get crushed. The average is mediocre. The best funds are usually closed to new money. What's available to you is often not what you'd want to own.
What this lesson is NOT
This explains what hedge funds actually do, who can invest, and why their average performance often underwhelms after the famous fees. The gap between the best and worst funds is enormous, so the average says little about any one of them. It is not a guide to choosing a fund or a claim that they beat a simple index.
Quick check on this lesson
Answer each question and we’ll show you why the right answer is right, and why the others aren’t.
- 1.
Per the lesson, what's an honest assessment of how the average hedge fund has performed over the past 15 years?
- 2.
Per the lesson, what did 'hedge' originally mean, and what does it mean today?
- 3.
Per the lesson, who can typically invest in a hedge fund, and what are the minimums?
- 4.
Per the lesson, what's the 'two and twenty' fee structure, and what's the implication for the manager?
- 5.
Per the lesson's 'dispersion problem,' how does this affect what you can actually buy?
0 of 5 answered