GENERAL INVESTING SECTION

The now infamous quote goes something like this –

Hedge funds are a compensation scheme masquerading as an asset class.

Which translates to Hedge Fund personal using clients money to enrich themselves first and then (hopefully) their clients. Too bad if the clients lose money (or earn paltry returns) because those skilled at marketing their money management services know only too well that there’s plenty more suckers out there who believe in the mysterious Hedge Fund aurora.

Want proof of just how bad Hedge Funds are for the majority of investors then this new study Demystifying Hedge Funds II', Presidio Financial Partners LLC, a San Francisco wealth management advisor, compared the performance of a diversified portfolio of investments to the HFRI Fund of Funds Composite Index, the industry benchmark for HFOFs

• The study found that from April 2000 - at the height of the equity bull market - to March 2006, the diversified portfolio generated an average annualized return of 6.3%, compared to 5.2% for the HFRI Funds Index
• According to Presidio's findings, over a longer period, from January 1990 to March 2006, the same pattern of investment returns was repeated
• The diversified portfolio of investments generated an average annualized return of 10.6%, compared to 10.1% for the HFRI Funds of Funds
• The study concluded that only 12 to 15 of the more than 1,000 HFOFs – and no more than 250 of the more than 8,000 individual hedge funds – deliver performance in line with their higher fees

Those are staggering findings so let’s just look at them in percentage terms.

Of the Hedge Fund of Funds just 1.2% - 1.5% have been worthwhile investments and in the general Hedge Fund market just over 3% have performed.

Conclusion – For 99% of potential investors the really successful funds are not open for new investment so the odds of you picking a fund that delivers and perhaps more importantly deserves its large fees are virtually zero.

• Read the full report here