Here Are 3 Top Hedge Fund Favorites For Your Portfolio...
By Nathan Slaughter
Hedge funds are something of a mystery to many. On the surface, they are pooled investment vehicles, just like mutual funds. But any similarity ends there. These funds typically use speculative (and often arcane) tactics and strategies to reach their goals. And they employ some rather exotic instruments, like credit default swaps.
They can buy rare artwork, engage in short sales, or make highly leveraged foreign currency bets. Some focus on spinoffs, bankruptcies, and distressed debt. Others use options spreads and straddles to profit from implied volatility. There is a whole class of convertible bond arbitrage funds that "delta hedge and gamma trade" to exploit pricing inefficiencies.
Because they are risky, opaque, and sometimes illiquid, hedge funds aren't really meant for ordinary investors like you and me. We are the hoi polloi. These funds are essentially invitation-only. They're reserved for "accredited investors" with specific income ($300,000 for joint filers) and net worth requirements.
Investors (usually referred to as limited partners) must often hand over a minimum of $1 million to $2 million just to get in the door. And they pay exorbitant fees. The typical arrangement is an asset management fee of 1% to 2% plus a performance fee of 20% of any profits.
Can you imagine a mutual fund investor earning 8% in one year being forced to surrender 2% in fees and another 2% in profit sharing? That wouldn't fly. Wealthy investors and institutions (who often weigh performance on a risk-adjusted basis) open their checkbooks expecting big results. And they often get them.
Many of these alternative strategies are meant to deliver positive absolute returns even in flat or declining markets. Others are designed to light up the scoreboard with triple-digit gains. To be sure, they don't always work. Some funds backfire spectacularly and sustain billions in losses. But the hedge fund industry attracts some of the best and brightest talent. Million-dollar bonuses will do that (even junior analysts often pull in $300,000 salaries).
And let's not forget… These shops hold more than $4 trillion in assets, so they have no shortage of financial resources.
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