(www.fairfieldcountybusinessjournal.com) – The recent blowup of the Bayou hedge fund has again brought the dark side of hedge fund investing into the forefront. As an advisor, I love the ability of hedge funds to deliver absolute returns regardless of market direction but I worry about giving clients’ money to someone and then trusting that it will not be misappropriated or lost in aggressive investment strategies. I believe a better way to get the benefits of hedge funds without some of the drawbacks is to invest in mutual funds that follow hedge fundlike strategies.
Hedge funds can be a viable part of any investment strategy. For the most part, they seek to generate absolute returns regardless of market direction and they tend to be noncorrelated with traditional stocks and bonds. The downsides are that you have to be an accredited investor to invest in them (earn $200,000 a year or have $1 million in assets), they are illiquid, there is little, if any, disclosure on the underlying investments and fees can be steep with most funds charging a management fee plus a percentage of profits.
