Most hedge funds have had a poor start to the year. According to Hedge Fund Research, hedge fund portfolios gained only 3.5 percent in value from January to May of 2017, heavily underperforming the S&P 500 Index, which generated a return of 7 percent in the same time period.
Hedge funds are investment funds that can invest in a wide array of assets and adopt different types of investment strategies. Unlike mutual funds or pension funds, hedge funds are not constrained by regulatory requirements to primarily invest in stock and bonds and can, therefore, also invest in real estate, derivatives, and currencies, among other asset classes. This freedom of choice is what gives hedge funds a competitive advantage over traditional funds. For this ability to generate better returns, hedge funds charge a high annual management fee (usually 2 percent) as well as a performance fee. However, as witnessed in the first five months of 2017, these fees are not always warranted.
The HFRI Fund Weighted Composite Index, which is an equally weighted index that tracks the performance of hedge funds, is up only 0.5 percent in May, while the S&P 500 Index is up twice as much. Given the …read more