What Are You Really Getting When You Invest in a Hedge Fund?

by William Reichenstein

What Are You Really Getting When You Invest In A Hedge Fund? Splash image

Hedge funds are all the rage in the investment industry. Their historical returns look great. And best yet, their returns often are weakly correlated with the stock market—a feature that has helped their appeal in the 2000–2002 bear market. They are touted as a great asset class for adding diversification to a portfolio. What a deal!

But, CAVEAT EMPTOR—buyer beware! If it looks too good to be true, it probably is.

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This article takes a critical look at hedge funds and whether they can play a useful role in an individual investor’s portfolio. Traditional advice encourages individuals to take control of their finances, concentrating on factors not the least of which includes their asset allocation decision and the costs of their investments. Hedge funds mess up these controllable factors—they have high costs, and many are not clearly categorized as stocks or bonds or cash.

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