Warren Buffett has called hedge funds "manager compensation schemes." According to a recent article in The Economist, "Rich Managers, Poor Clients," investors pay for manager expertise, but controlling costs is a better way of having a successful investment than betting on a manager's track record. Some hedge funds charge performance fees of 20% of the gains plus another fixed 2-3% management fee regardless of whether the fund is profitable - a total of 22% in fees. In other words, the hedge fund would have to gain over 22% for investors just to breakeven. The only way to achieve those types of returns is to take extraordinary risk with your investment capital. As The Economist article stated: "It is easy to think of people who have become billionaire's by managing these hedge funds; it is far harder to think of any of their clients who have got as rich."
It is not only the costs associated with hedge funds that trouble me. The reality is they have performed poorly over the last 10 years, while they have made hedge fund managers very wealthy. As measured by the HFRX Indices (widely used benchmarks for hedge fund performance), hedge funds returned just 3% in 2012 compared to an 18% return of the S & P 500 stock Index. The major problem all hedge funds suffer these days is that they have attracted so much money that they cannot invest as they did in the past. There are too many dollars chasing too few market opportunities. And now, hedge funds are "going retail" and becoming widely available to small investors in Funds of Funds and becoming embedded in variable annuities, pension funds, endowments, foundations and other retirement plans. There are nearly 8000 hedge funds on the market and more coming online every day.
The biggest problem we have with hedge funds is a lack of transparency and the lack of due diligence that many brokers perform prior to offering and selling these investments to their biggest and best clients. The complexity and lack of transparency of hedge funds makes them the vehicle of choice for fraudsters. The United States Securities and Exchange Commission (SEC) has become especially concerned and set up a special unit "The Market Abuse Unit" to investigate the problems and abuses in the hedge fund industry. The SEC and the attorneys at our law firm are concerned about unregistered investment advisers engaging in general solicitations to unaccredited investors to put their capital in unregistered hedge funds. Too many retired, income-oriented investors, in search of higher yields have been misled into a number of hedge fund frauds such as the MAT/ASTA funds offered by Smith Barney and Citibank advisers.
Have you suffered losses resulting from an investment in any hedge fund? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation. Mr. Pearce is actively investigating and accepting clients with valid claims against hedge fund salespersons who fraudulently offered and sold the fund to investors.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.