Whenever someone asks me about hedge funds, I explain the following. Hedge funds use strategies that provide above market returns most of the time but occasionally blow up. If you factor in the blow-up and the incredible fees they charge the long term expected return is generally poorer than what you can get by investing more traditionally.
Bear Sterns troubles, along with Amaranth last year provide great examples of what is meant by “blowing up”. Unfortunately, since a particular strategy does not “blow-up” very often, the risk is typically under priced in the market, except maybe right after one of those events. So if you want to invest in a leveraged CDO hedge fund wait around 18 months.
This entry was posted by David on July 18, 2007 at 11:34 pm, and is filed under Investing. Follow any responses to this post through RSS 2.0.Responses are currently closed, but you can trackback from your own site.