Don’t Cross Off Hedge Funds Right Away

By: ispeculatornew
Date posted: 07.23.2013 (3:00 am) | Write a Comment  (0 Comments)

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feesHedge funds.. they are at the center of a lot of what happens in the markets these days and I certainly found the latest research about their performance very interesting. I don’t think anyone would argue that things are going well for hedge funds. There has been research about performance, headlines about insider trading, etc

Don’t Cross Off Hedge Funds Right Away

For every bad example of hedge funds, there are good examples. Yesterday, Daniel Loeb announced he was selling off most of his Yahoo stock and getting off the board. He made a killing by seeing an opportunity of a mispriced asset, getting the company to get rid of a poor CEO and replace him with Marissa Mayer which has certainly turned out to be a brilliant bet.

He made a killing and certainly deserves every penny of it. He might make other mistakes but I’d argue that hedge funds will continue to do well because they’re able to make big bets, have the most brilliant investors (because that is where they’re best compensated for their performance). If anything, with banks slowly getting out of prop trading, I’d bet that hedge funds will continue to become much bigger.

There Are Concerns

Of course, having big hedge funds certainly adds some concerns. There are the “too big to fail” funds which could have a big impact on distressed markets as happened a few decades ago.

Then there is also the culture of excess. I just came back from vacations where I read “Buy Side”, a fascinating book written by a former hedge fund trader who gives a good idea of how relationships between the buy and sell side create a very odd world. It becomes clear that while getting good returns for investors is important, more than anything it’s about every trader, sales guy and others looking out for themselves. I highly recommend the reading if you’re looking for some entertaining holiday readings.

Would I Ever Invest In Hedge Funds?

It’s certainly possible that I will one day invest in a hedge fund but I wouldn’t say it’s probable. I certainly plan on having enough to be an accredited investor ($1 million in liquid assets or earning over 200K for 2 straight years) but if there’s one thing I’d more likely do, it would be investing in start-ups that have yet to become public. It’s just a lot more interesting to me and I’d feel like I had more control over it. Yes, hedge funds could be interested but I always feel like there’s a lot of risk involved (and fees) which more than offset the potential gains. I might change my mind over time but right now I don’t see that happening.

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