Get the Hedge Fund Edge
By Sharon Rockey
Unless you are just surfacing from an extended underwater exploration of Antarctica, you don't need us to tell you how the equity markets have been performing lately. Would "less than stellar" be an understatement? While Wall Street ricochets between volatile and the doldrums, investors search for solid ground.
Not since the mid-70's have the markets been under such sustained assault --a two-year old bear market kicked-off with the high-tech implosion, followed by a tanking economy, followed by September 11, followed by some major mischief in corporate ivory towers, followed by threats of. . . .well, you get the picture.
Many experts predict it will take many more months before the economy and the markets show real signs of recovery. So, what should you do in the meantime? Are there any alternatives that will let you stay in this unforgiving market and still keep your wealth from slip-sliding away? We all know there are no absolute guarantees in this game, but there are definitely ways to safeguard your investments--ways to potentially profit regardless of the market fluctuations, and ways to sustain better than average protection against losses. Shall we tell you how?
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A Safer Harbor?
While you sit and watch the indexes sink month after month, Hedge Funds--those often misunderstood, free from SEC rules investment techniques--still seem to make more money or at least lose less than the rest. For the right investor, they may offer a safer harbor than more traditional investments. When the market goes on a run, quick-acting Hedge Funds can move in to capture the gains. When the bottom falls out, they seem to come out of nowhere to clean up on short positions.
And in the very worst case, if they are not increasing investors' wealth, they can provide better-than-average protection against loss.
Lets Look at the Numbers
During the last 14.5 years, the S&P 500 Index has had 14 negative quarters, totaling a negative return of 90.8%. During that same time period, the average U.S. equity mutual fund had a total negative return of 95.2%. But the average Hedge Fund had a total negative return of only 5.6%--pretty conclusive evidence that Hedge Funds are doing something right, that they have the ability to preserve capital in falling equity markets.
If you want to compare more recent numbers, American Banker recently reported this: For the year 2002 through August 31, the S&P dropped 19.4%; the Dow, 12.4%; and NASDAQ, 32.4%. But Hedge Funds averaged only a 2.3% decline. During the month of August, about 60% of Hedge Funds appreciated during the month and the best performers reported monthly gains of more than 5%.
Important Questions, Important Answers
The statistics seem to indicate two things:
1. Hedge Funds have a proven ability to weather rough market conditions and
2. some Hedge Funds do better than others.
Why do some out-perform others? It all depends on who manages those funds.
Before you even consider investing in a Hedge Fund, you should do a little due diligence on the people that will be making your investment decisions.
Read our article "What About the Hedge Fund Manager?"
Next-->What About the Hedge Fund Manager?
