The 2008 crisis laid investors low. And ever since, they’ve been looking for some type of Holy Grail. With up to 40% hits on portfolios from the crisis and near zero interest rates for the past five years plus a similar outlook for at least another two years, who can blame them?
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So they’ve looked to high yield bonds and also to mutual funds that either look like or act like hedge funds, offering what are referred to as absolute returns—returns not dependent on market moves.
And anything with the absolute return, market neutral, or total return labels on them have been an attraction for significant investment dollars.
Are these funds the answer? And do they deliver what they promise?
Hedge funds have a mystique
about them. They used to be the exclusive cadre of the significantly wealthy. And with the volatility in the market place, hedge funds should have been doing quite well. But they have not.
The industry is experiencing net redemptions and the average hedge fund return was down in 2011. The best hedge funds actually can produce higher returns or reduced risk, or possibly both. But their numbers are few and even if investors do find them, the likelihood is that the funds already have all the investors they want.
The top 1% or 2% of funds really do beat the market over a 10 to 15 year time frame. The rest don’t do so well. eVestment Alliance is an industry research firm that reveals the real story.
Over the five years ending in 2011, the median hedge fund gained 23%. It gained 104% over a 10-year time span. That sounds really good…until you compare it to returns from a benchmark portfolio with 60% exposure to Vanguard’s Global Equity fund, 20% to Vanguard’s Long Term Treasury fund and another 20% to Vanguard’s Treasury inflation-protected securities.
That portfolio gained 15% over the five years ending in 2011. That return was better than over half the hedge funds in the eVestment database. And over 10 years? The portfolio returned 115%--a return that, again, beat the median hedge fund and also charged investors much lower fees.
The takeaway from all of this is that there really is no Holy Grail and investors need you now more than ever to help them make smart investment decisions.