Selkirk,
All good points. When I say good returns, I always mean net of fees. Also you can pay a yearly fee to a broker/money manager and go in at NAV into any fund family at any time and move in or out as you want. Usually the fee is between 1 and 3%. I also understand that give or take, 70-80% of mutual funds underperform the indices. My main problem is with people and saying just invest in index funds, and you'll be fine. I strongly disagree with that statement. If you were invested solely in index funds 10 years ago and were going to retire this year or next or even the next, you would have a great shortfall and may have to work longer to cover your shortfall. I preach diversification. I know for you, and this is a complement, that diversification is a no-brainer, but for the average investor who thinks investing solely in index fund, I think they are setting themselves up for a dissappointment.
On to Hedge funds:
I strictly invest for my clients in fund of funds, which is a diversified group of hedge fund managers who use hedging strategies when investing. This creates an un-correlated portfolio that just like a portfolio of mutual funds, should perform better than holding one fund. When I say hedge fund, I know you may get defensive because they are unregulated by the SEC here in the U.S. I do agree that along with mutual funds, there are good and bad, and now that they have become popular, just like with anything, there will be plenty of poor managers. However, the hedge fund managers I use have track records, do report to the SEC and have an outsuide auditor look at their books. Now with the fees, here is how ours is set up, and it varies widely from my company to any other company. Let's use a million dollar investment as a hypothetical starting point. My client is going to pay 3% up front, so $970,000
goes to work. There is an annual fee of 2% to the client no matter whether the fund is up or down. Now on to the back end. The client is liquid after 2 years and can access their money quarterly. The back end load is dependent on performance. The fund has to average at least 7.5% average annual returns net of fees which includes the front load for the managers to earn anything for themselves. The grid goes like this 7.5%-10%, managers earn 5% of total profits. 10%-20%, they earn 7.5% of profits and anything above 20%, they earn 10% of profits. I personally like this because it puts you on the same side of the fence as the manager, in that if you don't make money, neither does he outside of the yearly managment fees which get split up between the broker, the fund, the wirehouse, and also general expenses. I know am being long-winded here, so please bear with me. I can tell you that my clients who have been in the fund, have been extremely happy, as our fund is (without having the numbers in front of me right now) flat for the year. I would say that 90% of all investors would be extremely excited to have that return this year. I know you will ask me historical returns, and I don't have them in front of me, but I know that they are great. I would never even suggest however that more than 25% of any client of mines wealth be allocated to this fund either, because again I preach diversification. Hedge funds #1 goal should be wealth preservation and #2 growth.
If I rambled and sounded incoherent, please forgive me, but my entire arguement here is that one should weigh all options, do all due diligence, and then make an educated decision. Not all investments are for everyone.
In closing, I value your opinions because you are probably smarter than I am, but I know that do-it-yourself investors and brokers/money managers rarely see eye to eye on fund choices and fees. Many of my clients though are way too busy with their work, families, social life to focus on their investments, and don't want to worry what the mmarket is doing, they just want to make money, and that is where I come in.
Oh, and one mmore thing, you are right about companies creating funds because they are marketable. They know what will sell and what the consumer wants, whether it is a good time or investment.
I will also work on finding numbers on the best fund managers in the world and who they work for,whether load or no-load, and how they are compensated.
So, I now close this novel, and am heading to bed.
