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Hedge funds

I have limited to zero knowledge of these. I understand that high net worth individuals will pay significant annual percentages of their investment to the hedge fund manager (2-3%), and you need a very high amount to be able to enter.
Meanwhile, for more regular investors, it is very common on here to argue that they are throwing money away by using IFA's to manage their investments, at a 0.5% annual fee.  
It is often said that with some reading and effort, regular investors can avoid that 0.5%.
So what (possibly stupidly) am I missing here?  
Do these hedge funds have access to investments that fund managers that allow retail investment don't? 
Do high net worth individuals not care? Can't be bothered to manage it themselves?
Are hedge fund managers so much better at beating the market?  

Comments

  • ratechaser
    ratechaser Posts: 1,674 Forumite
    Seventh Anniversary 1,000 Posts Name Dropper
    edited 21 January 2021 at 3:46PM
    I'm sure bowlhead will be along with a comprehensive analysis of trad -v- alt -v- hedge funds, but just as a starter for 10, you won't find a lot of short selling, derivatives, complex algo trading or other higher risk strategies in the funds that retail investors invest in. Nor do retail funds tend to be domiciled in exotic locations with palm trees, rum punch and limited regulatory oversight.

    Going back some years, the idea of these funds was to 'hedge' specific risks in the market that financial institutions were exposed to - therefore they had set trading strategies that made sense to institutional investors, but didn't have the same value to the retail market. And of course they sometimes failed to work spectacularly - LTCM comes to mind.

    But these days, The term Hedge Fund is more generally used to describe anything with a more bespoke/exotic strategy or objectives, and often with no benchmark that can be used to judge relative performance. So restrictions on investing are largely a point of what retail investors can be trusted to understand in terms of risk that limits the activity of the funds they invest in. Because even if they SAY they understand... well, here's 3 letters for you - LCF...
  • poppy10_2
    poppy10_2 Posts: 6,581 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    Cus said:
    Do high net worth individuals not care? Can't be bothered to manage it themselves?
    Are hedge fund managers so much better at beating the market?  
    Hedge funds don't generally set out to beat the market, but to hedge their bets so that they don't lose money even in downturns. Often it is more about capital preservation that aiming for huge growth.
    But they often fail even at that - in last year's downturn most hedge funds fell and then didn't get the benefit of the market rally
    Rich people often think they can get better if they pay more. For the vast majority of them they would have been better off investing in a simple 0.2% global tracker.
    Warren Buffet famously had a $1 million bet for charity that over a ten year period, a basket of hedge funds would underperform a simple S&P tracker. He won his bet.
    https://money.cnn.com/2018/02/24/investing/warren-buffett-annual-letter-hedge-fund-bet/index.html

    https://www.marketwatch.com/story/hedge-funds-still-cant-keep-up-with-the-stock-market-2019-10-15
    https://www.ft.com/content/9bd1150e-1b76-11e6-b286-cddde55ca122


    poppy10
  • JohnWinder
    JohnWinder Posts: 1,861 Forumite
    Fifth Anniversary 1,000 Posts Name Dropper
    Most of your answers here:
    and here: evidenceinvestor.com, search box for 'hedge funds'
  • Hedge funds are great for the people running them, for instance you get rich and marry girls like Pippa Middleton. The results for Joe Public are less certain.
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