Should You Invest in Hedge Funds?

You get what you pay for, right? While this adage rings true in the retail world, it does not apply to hedge funds. In fact, California Public Employees’ Retirement System (CalPERS), the largest pension fund in the U.S., recently announced that, due to the high cost, it is pulling all $4 billion out of its hedge fund investment program of 24 hedge funds and six hedge fund-of-funds.

Hedge funds generally charge fees of 2 percent of assets and 20 percent of returns. CalPERS reports that it paid $135 million in fees in the fiscal year that ended June 30 for hedge fund investments that earned 7.1 percent, contributing 0.4 percent to its total return. An investment in the MSCI All World Equal Weight stock index would have earned 21.7 percent during that same period and cost a lot less!

CalPERS was one of the first pension funds to invest in hedge funds in 2002.Given their industry leadership, CalPERS’ divestiture will lead others to reconsider investing in hedge funds which, in spite of the industry moving to greater transparency, remain cloaked in secrecy, insisting managers are worth the high fees because they can outperform the markets. Of course, we know attempts to time the market are a waste of time and money. In fact, research shows that each year approximately 80% of active fund managers underperform their respective benchmarks, proving that market prices reflect most of the available information and that no investor, not even highly paid hedge fund managers, can hope to know more than the total market knows.

Rather than buy into hedge funds touting their ability to forecast the future and pick better stocks, we employ Evidence Based Investing which is grounded in decades of solid academic research, focused on education, and intentionally designed to create and maintain real wealth. That approach makes sense for pension funds, too.

To read more on this subject, read “Hedge Funds’ High Cost and Correlations Can Be Problematic.”

Hedge Funds

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