Hedge Fund Reader : Are hedge funds worth the risk?

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April 22, 2006

Are hedge funds worth the risk?

If you see the records of hedge funds, you will certainly not be impressed. Mainly due to the fact that over long periods, hedge funds tend to significantly underperform index funds. But then maybe it is not fair to judge them so, as they are not meant to be like the index funds.They are called hedge funds - because they can hedge, or sell short.

But still one should be aware of the risks it carries. To begin with, hedge funds tend to attract more tax liabilities because they trade so often and hence have a considerable short-term taxable income. And of course, one cannot overlook its high fees.

According to a study, even if hedge funds earned almost 50 percent more than other market returns, still after all the cuts, the net return to investors would be probably 20 percent less than the much safer index funds.

So when it's so risky, why is it still in demand? Because some of them do incredibly well. But if you ask me, one should take calculated risks and has to be really market savvy, for rarely do any of them do that well for a long stretch of time.

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April 22, 2006 in Research | Permalink