The hedge fund industry has drawn some flak of late. As technology advances and information becomes more accessible, many hedge fund managers are finding it harder to identify unique and lucrative bets. Since Brexit and the election of Donald Trump as US president, the market has also become more volatile and unpredictable.
As a result, global hedge funds produced returns of just around 5% in 2016 compared to the 10% generated by the S&P500 stock index, according to Hedge Fund Research. That led to the withdrawal of some US$111 billion in funds from the industry during the year, data from eVestment shows.
Yet, the top 25 hedge fund managers collectively earned US$11 billion last year, according to a recent report by Institutional Investor’s Alpha magazine. The best performer for the year – Renaissance Technologies – made US$1.6 billion last year, or US$4.3 million a day.
That implies there is still good money to be made by investing with the right hedge funds. So, are mutual funds that track indices like the S&P500 really a better choice of investment than hedge funds?
Mutual funds are generally viewed to be safer and cheaper. This is because they are de-signed to match the performance of an underlying asset, usually Treasuries or stocks.
Hedge funds also involve leverage, which can double or triple its returns. Trades can be multi-directional, for example, both long and short simultaneously.
Notably, by investing in a hedge fund, investors aren’t limited to stocks and bonds. They’re able to gain exposure to assets like currencies and commodities, which are riskier but can yield much higher and quicker returns.
In short, if you’re able to stomach the higher risks and fees involved, you’re still likely to get better returns by investing in a hedge fund, especially with most stock markets already overheated.
How can investors identify the hedge funds of quality among the quantity?
While there are no hard and fast rules to identifying the hedge funds that can guarantee you the best returns, the most basic is to do your own due diligence. You can start by checking if your chosen fund is registered with the relevant regulator. For example, CP Global is registered with the Monetary Authority of Singapore.
Next, investigate the fund’s track record. Look out for a minimum performance record of three years.