Hedge funds were designed to return profits on investment whether the market was good or bad. The term hedge fund, however, is slowly losing the reliability it once possessed thanks to the mushrooming of hundreds of wannabe hedge funds that are nothing more than mutual funds passing themselves off as hedge funds.
Here are a few of the more prominent signs that a hedge fund promises more than what it can deliver:
No meaningful record. Two-thirds of alternative funds didn’t exist before 2008. Heck, 20% of all these funds didn’t exist before 2010. Look for funds with records of solid performances, and beware of companies that tote back-tested hypothetical results. A good hedge fund will always be clear and precise with its results, not hide behind hype and semantics.
Extensive and unnecessary fees. Private hedge funds typically charge a 2% annual fee and take around 20% of all profits. You should, however, find justification for all fees being asked of you. For example, will a 4% annual fee being justified by the manager’s “expertise” really net you returns that exceed 4%? Again, reviewing the track record of a fund is a pretty good way to see if the fees are justified.
“Black box” strategies. If the hedge fund owner refuses to explain to you, the investor, where your money is going, then you had best take your money elsewhere. A good hedge fund manager will always be able to explain where an investor’s money will go to, especially if the investor insists on that information. These managers will also explain it in a way that you will understand it as well, so be wary of managers that resort to jargon when explaining their investment portfolios to you.