It’s very clear that the one lesson that investors all over the world learned from the credit crisis and market turmoil over the last
two-and-a-half years is that markets don’t always rise. Many investors, sophisticated or not, before 2008 believed that what went up continued to go up. Well, many lost considerable amounts of money operating under this assumption.
Investors need portfolios that zig when the markets zag and vice versa. One-way investing is not good for anybody – which is why we need hedge funds now and forever. Hedge funds, in their simplest definitions and practice, are supposed to make money regardless of what is going on in the market overall. Hedge funds are supposed to zig when the markets zag. That’s why they’re called hedge funds. The idea is simple: Create a portfolio of longs, marry them to a portfolio of shorts and you make money when markets rise and you make money when markets fall. Period. End of story…
I wish it were that simple. Unfortunately, it is not. There are many people who masquerade as hedge fund managers who are really long-only managers. These managers do not hedge, do not protect against the downside, and still collect significant fees. The reason these people are able to exist is because of the lack of due diligence investors should apply before, after and during their investment. Due diligence – on-going due diligence — is the key to the success of any investment, regardless of how large or small. People need to get involved with their money and do the research to make sure that they are getting what they pay for.
A recent New York Times story suggested that hedge fund managers were getting what they deserved as more and more investors are redeeming and demanding a discount on fees. Click here to read. As I have said before and will continue to say, the only people who complain about fees are those who cannot charge them. The fees that hedge fund managers charge are based on what the market will bear. When the market demands a price correction, well, guess what – the fees will adjust accordingly. This is Market 101 – taught in Economics 101 at universities around the world. It would seem that some of the folks at The Times need a refresher course.
The next HEDGEAnswers is just around the corner – March 16th. You can register by clicking on this link. The conversation will be fast and furious. Topics that we will be covering include structures, regulations, taxes, audits, and administration. We will also be talking about marketing and business development. Get in on the discussion. Register today!