Posted: December 1, 2014 | by: Thomas F. McKeon, CFA
With apologies to Sir Winston Churchill, we present above our most succinct summary of the hedge fund proposition.
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The long-form version is this: why does “smart money” continue to enlist itself in opaque, illiquid, complicated and highly-leveraged schemes that charge outrageous fees for the right underperform two-year Treasuries? We‘ve looked at all sides of this equation, studied years of returns from “alternatives” and concluded that hedge funds are much better for the guys who manage them than the clients who invest in them.
Our attention returned to the hedge fund conundrum last week when we saw an article in the Wall Street Journal that revealed the industry’s latest insult - hedge fund operators are considering extending their lock-up period to two years from the current standard one year commitment. Gosh, who wouldn’t go for that? Why invest your money in liquid, low-cost, transparent, unlevered and unencumbered strategies when you can help a hedge fund operator buy an NBA franchise? They’re all smart guys and they should be given a chance to do to professional sports what they’ve done to the world of fiduciary investing.
Forgive our bilious outpouring but we are certain that investors deserve an alternative to “alternatives”. And there are some to be had: If you want the returns of two-year Treasuries, buy two-year Treasuries. Or, a liquid, low-cost ETF that buys them for you. Those returns can be had for pennies on the dollar, compared to hedge funds.
If you need to invest in equities and want honest, simple, transparent protection against volatility, look for a manager that marries the certainty and economy of passive investing with a rules-based, strategic and structural option hedge. We can recommend one.