But why all the fuss? Is it because of sub-par equity returns in the past three years? Or the purportedly superior risk/reward profiles boasted by hedge funds? Or perhaps their limited access?
Whatever the cause, hedge funds have earned permanent placement in the financial vocabulary of most investors. The world of investments is often surrounded by a stock-of-the-week mentality, a short-term mindset. Yet hedge funds are not just a fad. In fact, a diversified group of hedge strategies has historically produced equity-like returns but with less market risk.
While the benefits of hedge strategies may no longer be in question, investors still have difficulty implementing them in their portfolios.
Typically, a hedge fund in a limited partnership format requires investors to be accredited. This means the individual investor must have $1 million net worth or earn an annual salary of more than $200,000.
This is not the profile of the average investor, so how does the average investor use hedge tactics in his or her portfolio? Perhaps more important, if investors find a means of doing so, are they giving up performance to the accredited elite?
I contend that the most suitable alternative to limited partnership hedge funds is a mutual fund, but not your run-of-the-mill mutual fund. Just like their hedge fund limited partnership cousins, these funds employ strategies such as global macro (a hedge fund name for tactical asset allocation) market neutral, long/short equity, announced merger arbitrage and convertible arbitrage, to name a few.
Many of the most talented portfolio managers have begun a migration toward the hedge funds (limited partnership format) arena. This will put a premium on talented mutual fund mangers who can implement these hedge type strategies. However, they do exist and, in fact, many of these same managers run both types of funds.
By and large, nonaccredited investors are better off with these mutual hedge funds in their portfolio than without. I believe that investors can use these hedge-like mutual funds to reduce their portfolio risk and increase their long-term performance. Louis P. Stanasolovich, is president of Legend Financial Advisors Inc. Reach him at (412) 635-9210 or www.legend-financial.com.