Hedge Funds Fail - Your Survival Guy

This week it was reported that Tudor Investment Corp., one of America’s most expensive hedge funds, will be cutting its very high fees from 2.75% of assets and 27 percent of profits to a still very high 2.25% and 25% respectively. Still much higher than most of the confiscatory fees one will find among hedge funds. After hearing this I recalled what Dick Young wrote in his Intelligence Report a couple months ago, Hedge Funds Fail.

Hedge Funds Fail

Given the above, it was with some astonishment that I read Tim Martin and Rob Copeland’s recent Wall Street Journal exposé “Investors Pull Cash From Hedge Funds as Returns Lag Market.” “Lag market” is being kind. As the article explains, hedge funds have now lagged a “traditional mix of stocks and bonds for six straight years.”

2% and 20% of Profits

Rubbing salt on the wound is that hedge funds traditionally charge pension funds greedy and unrealistic fees—2% of assets under management and 20% of profits. As a basis for comparison, a diversified stock portfolio over many cycles might provide an average gross 10% annual total return (6% return from capital appreciation and 4% from yield). But layer on an anchor of a 2% management fee and a 20% fee on profits, and gross returns are slashed by a startling 40%, to only 6%. Look, investing is a zero-sum game. Each transaction includes a buyer and seller. One—never both—will be a winner, which means at least 50% of a given group of investors ends up as underperformers. And that is before the addition of usurious fees.

I Became a Former Trustee

Three decades ago, when I was a trustee at a major business school, I stood out like a sore thumb because of my opposition to hedge funds. And perhaps not shockingly, I soon became a former trustee. Well, 30 years later, I would still cast the same vote for the same reasons I have just outlined. You could argue that maybe I’ve not learned much over the decades, but my 50-year track record of generating few sizable portfolio losses proves otherwise.

My Prudent Man Rule

So I do not condone most hedge fund tactics, and I do not suffer the debilitating level of fees outlined above. Rather, I practice the Prudent Man Rule of investing and tightly follow my long-time theme of patience, time, and compound interest. Can this effortless investing strategy really create millionaires? Well, for illustration, I’ll give you a little basic arithmetic and let you be the judge. My overriding goal here is to make absolutely certain you come away from reading this issue with a whole new and profound appreciation for the two most important words in the investment universe—compound interest.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.