Why Invest in Hedge Funds Again!

Because most hedge funds don’t try to beat the market. That is not their purpose. I’ve answered this before, but will try to give it another shot here.

First, to understand this, you have to know what a hedge fund is — and it is not an index fund. Rather the term “hedge fund” really just means “private investment fund.” There are hedge funds that trade stocks, others bonds, others real estate, others that invest in startups, others that invest in volatility, others go short, others go long, others do both....really if there’s a way to get a return for your money, there’s probably a hedge fund devoted to it.

Smart investors know that in order to protect their money they need to diversify. It’s idiotic to put all $10m you have into the SPY ETF. If the S&P 500 were to fall 50%, you’d lose 50% — not a small amount of money.

Also, the last decade aside, investors normally get better returns by diversifying into different asset classes. The last ten years (12 really) has been unique in the market history. Over time, investors are normally better off in multiple asset classes. Hopefully you already knew that.

Let’s say you have $100m and need $1m a year to live. That’s only a 1% return. I could easily build a structure with a guaranteed after tax 1% return, with no risk to principal outside world ending type events. If you decided your believed me and wanted me to do that, I would form a company that would manage your money and you would place your money into it. TADA! Hedge fund created. For the next decade, I do exactly what you wanted me to do and you get your 1%, after all fees, expenses, and taxes. But over that same decade, the market went up 12% per year. Should you get mad at me or say I under performed? No, of course not, I knocked it out of the park and did precisely what you wanted.

What if you think market volatility has been way to low for way to long, and you think there’s going to be a big spike? You could put your money into a long volatility hedge fund. But then if volatility goes down for the next year and you lose half of your money, does that mean the hedge fund didn’t know what it was doing? No, it knew exactly what it was doing — it just happened to not be a profitable strategy.

You can’t get mad at hiring a barber to shave your head and then not like how you look bald. If he did the perfect job — quickly, no razor burn or cuts, no hair down the shirt, nice head and temple massage....but your look like a neon white lemon with weird pumps in your scalp (me), saying the “barber underperformed” makes you look like you don’t know what you’re doing.