Romney Loses Again
Recently I posted how the presidential candidates invested their money. Mr. Romney was primarily in hedge funds. As it turns out, this investment strategy is having a similar result as his campaign – winning expectation: losing result.
Originally hedge funds were created to dampen market downturns protecting principal for the wealthy. But the privilege of such "superior" management required huge minimum investments and incurred high ongoing costs.
Early on investors noted the high fees they were paying to achieve safer (lower) portfolio returns. In response, hedge funds evolved from providing safety to an effort of trying to beat the market…while somehow remaining less risky.
In investing terms beating a risk adjusted market return is called "creating alpha." Consistently doing this is the Nirvana of any active money manager. Unfortunately for investors, Nirvana is widely vacant.
The good news for hedge fund investors is sometimes some funds beat the market. The bad news is sometimes most of them don't, and don't in a BIG way. Meet 2012, a perfect year to rename these funds more appropriately: "Roulette Funds."
About 1 in 10 hedge funds eclipsed the S&P index return of @13% (year to date) while
2 out of 10 have a
negative return for the year. The average gross hedge fund return is about 6% for 2012.
Typical hedge fund fees are 2% outright plus 20% of any gain. The result is hedge fund investor paid 3.2% in fees to achieve a net return of 2.8% on average. Most managers confess they failed to produce alpha in 2012.
Rosecliff Capital Hedge Fund manager Mike Murphy explains the underperformance: "Funds hedged against a massive market correction with the memory of 2008 still fresh in everyone's mind. It's been a tough year but better times are ahead."
My question to Mr. Murphy is, "does this mean you will now invest using current information, or are you going to model your 2013 portfolio after what happened in 2009 (a stellar year for stocks)?
Sarcastic, I know – but I wouldn't be surprised if Mr. Romney is wondering something similar.
Active Bear Hedge Fund manager, Brad Lamensdorf, adds in defense of Hedge Funds: "Correlation between assets is so high, it is just a difficult environment to create alpha and still provide low-volatility returns."
For those thinking hedge funds deserve a break in an unpredictable market, let me point out two important facts:
1) The market is
always unpredictable.
For the second I need to restate what Mr. Lamensdorf said in layman's terms: "We couldn't beat the market in a low risk portfolio."
2) Inherent in beating the market is taking more risk.
So my question to Mr. Lamensdorf is…"what?"
While I doubt the average Joes and Janes out there are lamenting losses of hedge fund investors, 2012 is heartening – the little guy can win. The most consistent high performing asset known to man is the total stock market, and even we low-life surfs have access to it.
I welcome your questions and comments,
Marc Becker, AIF
Founding Partner Wiser Financial Coaching, LLC
becker@wiserfinancial.com
Marc Becker, AIF
Managing Partner, Wiser Financial Coaching
Columnist, The Advisor Sherpa
To read past articles and view past videos, visit:
www.marcbecker.tv
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