Bloomberg: "Hedge Fund Copycats Catch Mutual Fund Buyers as Returns Dwindle"

Back to a little blogging, after some time away. The linked article focuses on long-short, or market-neutral funds, now being sold to investors with much less in investable funds.

A couple of quotes:

"[S]ubpar performance isn't stopping the world's largest financial institutions, including UBS AG in Zurich and JPMorgan Chase & Co. in New York, from chasing higher fees by offering copycat hedge funds to people with as little as $1,000 to invest. Assets of the so-called long-short funds almost doubled to $16.5 billion in the U.S. in the past two years, according to Financial Research Corp. of Boston, which tracks money flows."

"'A lot of people buying these funds don't know what they're getting into,' said Ross Levin, 47, president of Accredited Investors Inc., an Edina, Minnesota-based financial advisory firm that oversees $650 million."

My take:
If you do not understand what you are getting into, don't get into it. Just don't. Ask for another explanation. Ask questions about how much you could lose. Insist on a clear answer. If it is a hedge fund-type of investment, you might ask how much leverage is used by the fund. The honest answer here is likely to be "I don't know. They don't tell." If your advisor or broker cannot or won't tell you how much leverage is used, you should know that more leverage involves more risk of extreme results, including extreme losses, and that even the SEC is having a tough time finding out how much leverage some of these funds are using. Ask him to tell you how this investment is safer than Amaranth, which "blew up", or Red Kite, which experienced severe losses when highly leveraged trades went bad. Or Pirate Capital. Ask him exactly how much he gets when you buy this thing. Ask him if he is being pushed or incentivized to sell it. If it is on some kind of list of things they wish him to sell, ask him if this is a conflict of interest. you might write down his answers, just as he gave them to you and ask him to sign it. He will not like that! Most likely he'll say that he can't do that!

You might ask how compatible this investment is with your risk and volatility tolerance. If you do not like the answers, it is OK to say "No". It's your money. The rep or advisor won't give you one dollar back out of his pocket if this thing hurts you financially.


Bloomberg.com: Exclusive