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Are Hedge Funds A Better Place To Put Your Money?

© Michelle Hogan

Recently, I read a report that stated hedge funds might actually be a better place to put your money than mutual funds. The report went on to say that, according to Van Hedge Fund Advisors International (they track hedge funds' performance), that almost all of them are ahead of the average equity mutual fund, year-to-date.

"From preliminary results, it looks like April is going to be a very strong month for U.S. hedge funds," says John Van, VP of Van Hedge Fund Advisors. "The average U.S. hedge fund is up 4 percent through March, while the average equity mutual fund is up only 1.7 percent", Van says. Apparantly, mutual funds are underperforming major indices due to the fact that the major indices are "being driven by a handful of stocks. Unless mutual fund managers hold the stocks that are driving the indices, they won't be able to match the performance". Because Hedge Funds are more "nimble", the report states, managers have greater freedom to move in and out of positions. Further, Hedge Funds are smaller so they don't move the market as much.

This brings us to a crucial point. What, exactly, is a Hedge Fund?

Well, as with mutual funds, investors pool their money and the manager gets to decide what to do with it. You generally need a lot of money to participate...at least $1 or $2 million in net worth. There have been funds with a minimum investment as high as $10 million.

These funds charge very high fees, often 20% of the profits that they make for the investors. You also cannot take out your money whenever you want to. There is generally a minimum commitment of a year or more. Hedge funds are unregulated, so they can do much more than trade stocks, bonds and Treasuries. Hedge fund managers can borrow huge sums of money, can sell short and trade options, mutual fund managers can not, or can only do so with severe limitations. Along with the possibility of huge profits, there is also a huge amount of risk, so these funds are very volatile. A fund might bet on particular moves in the market, such as waiting for the bond market to go up, or for a foreign currency to go up against the US dollar.

Hedge funds have had their share of troubles, and are not a place for a beginning investor, even with a high net worth, to place their money. However, Van Hedge Fund Advisors made this point,"The numbers show that in February, a volatile month in the markets,the average equity mutual fund was down 4%, S&P 500 Index was down 3.1% and the average US hedge fund was only down 1.9%." Van believes the restrictions placed on mutual fund managers contribute to this decline. In March, several types of U.S. hedge funds again pulled ahead of the S&P 500. They include U.S. Several Strategies, which uses a combination of investment styles to diversify its approach. The best performers in the United States were Aggressive Growth and Emerging Markets, which returned 5.7 percent and 5.2 percent.