The 2 Hedge Fund Misconceptions Everyone Believes


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Brendan: Let's talk about hedge funds for a minute. I know a lot of investors look at hedge funds, and these are the professionals. These are the experts. They should be killing the market, but what we see...

We saw a report from Hedge Fund Research that came out about a month ago, and it said over the past year to date, hedge funds on the whole were up about two percent, while the S&P 500 was up about 12 percent.

I think this is kind of baffling for some investors, but there are quite a few reasons for that, that you point out in the book. What are some of those?

Jack: Hedge funds, first of all, there's a confusion about it. There's confusion on both sides. People think that hedge funds are like this Wild West out there, so if you want to try to make these big returns, you go with the hedge funds but you can lose your shirt.

They perceive it both as very potentially high return, and very, very high risk, and they're wrong on both counts.

Basically, hedge funds over the long term, if you look over Fund of Funds Index which removes some of the distortions, it does about the same as the S&P. You look at long-term returns, you start like 15-20 years ago, you take that NAV line up, they both end about the same place -- so, compounded, they make about the same amount.

The difference is the equity indexes have huge swings down. The hedge fund index had one moderate -- 2008 was a bad year, it lost 20 percent -- but the equity indexes were down over 50. In 2000, 2002, it was kind of sideways to up, where the equity indexes also had a 50 percent draw down.

Ironically, equities are actually more risky than hedge funds, and they make about the same return, so misconceptions on both sides of that.

Brendan: Right.

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