In spite of last week’s pullback in the stock market many of the US market averages, and especially some sectors, have had a pretty good year, so far, with several showing double-digit gains in 2014.
Ever since George Soros reportedly made $1 billion in his bet against the British pound, many investors have wished they were able to invest in a hedge fund or like one.
Many would be surprised to learn that for the fifth year in a row, hedge funds have underperformed the S&P 500. In 2013, they returned an average of 7.4% according to the Bloomberg Hedge Funds Aggregate Index. This was 23% below the gain in the S&P 500.
There are several reasons why most investors should not invest in hedge funds or use their strategies. Many hedge funds invest based on their “macro view” of the stock market, economy, or interest rates. This investment approach does not generally employ any risk management strategy and is often based on a fundamental outlook. Fundamental changes generally take much longer than anyone expects.
The failure to factor the risk component into any investment can often have disastrous results as I have pointed out many times in the past. The failure to limit the risk on any one stock or ETF can endanger your entire portfolio as it is very tough to recover from a 20% loss on any one position.
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