Hedge Funds Underperform and Overcharge

I have long been suspicious of hedge funds. These privately managed funds are very lightly regulated. They are typically very secretive and unwilling to explain their investing methodologies. They charge very high fees that are typically 2% of funds under management and 20% of profits.

Hedge Fund Research reported that since the start of 2009, the average performance of hedge funds has trailed the return of the Standard & Poor's 500 index in six out of eight quarters. Hedge funds were up 10.4% on average in 2010 compared with a 15% gain for the Standard & Poor's 500 index, including dividends reinvested. (Source: The Wall Street Journal).

This is only part of the story, however. Most hedge funds pursue strategies that are risky. So, while we don't know for certain, it is very likely that in addition to underperforming the market, most hedge funds carried more risk than the market itself.

Investors should be very wary of hedge funds.