Is the Bloom Falling Off the Hedge Fund Rose?

Physician's Money Digest, November 2006, Volume 13, Issue 11

Barron's

Barron's

Hedge funds have increased in popularityin the past few years, especially amongaffluent investors. A survey of wealthyinvestors by the Institute for PrivateInvestors revealed that roughly 80% hadmoney tied up in hedge funds and almostone third have over 25% of their assets inthem. According to , however,with $1.2 trillion in assets entrusted toapproximately 8219 hedge funds, it simplyisn't possible for every hedge fund managerto perform above average. JonathanReiss of believes that the growthof the hedge fund industry will cannibalizeopportunities for the funds to exploit marketinefficiencies. Can money be made ifevery hedge fund is making the same bet?While this axiom can also be applied tomutual funds, hedge funds are differentbecause of the steep fees and expensesthey incur. This past June, the EuropeanCentral Bank labeled hedge funds as a"major risk" to financial stability. Reissstates that physician-investors should juststeer clear of hedge funds, but if you reallywant to be in the game, he suggests thestrategy of selling them short. This involvestwo investors: Investor A agreeing to payInvestor B the return on a hedge fund inreturn for a payment from Investor B of ashort-term interest rate. Investor B comesout ahead if the hedge fund's returns aregood, and Investor A will end up profitingif the returns are bad.