Hedge Funds for the Masses – Don’t Fall for it

It is always disappointing to see an article like this. Investment banks are working on ways to sell hedge funds with a lower minimum investment. Will they never relent on their mission to screw you out of your money?

Investment banks have been working this way for quite some time now. That is, bringing vehicles that are typically used for larger accounts down to the small account level. For example, early in my career I recall that “separate accounts” with lower minimums were the big deal. This is an account of stocks or bonds that is managed by an “expert manager,” kind of like a mutual fund, but the client had their own separate account, not just a share in a larger pool. The minimums for these types of accounts used to be several millions. The big deal in the early 2000s was that the minimums were coming down to the $250,000 level.

It was all about how the investor felt

The reality is that these account hardly did anything that would be better than a mutual fund. The only real advantage was the ability to tax manage the stocks a little better. But once you count in the higher fees and and the worse diversification, these account were far worse for the small investor than just owning an index fund. But they sure made the small client feel important!!

Different time, same tactic

Same thing is going on now with these low minimum hedge funds. The fees in the funds are going to be horrendous. I notice they are “funds of funds,” which means there will be two layers of high fees because you will pay for a fund to manage other funds. Plus there is extensive research showing that hedge funds under-perform with higher risk. For the most part, they are essentially legalized scams. And if you don’t believe me, just ask Warren Buffet. He knows how this system works, so he made a wager with a hedge fund manager that the hedge fund would lose to the S&P 500 over 10 years. Buffet is winning.

Investment banks just see larger clients as larger, juicer targets. Now they are setting their sights on the smaller investor as well. Don’t fall for this.

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