Hedge Funds Are Scary! Success Is Frightening!

One view on hedge funds from Loren Steffy of the Houston Chronicle:

Hedge funds need latitude to maintain the kind of returns that makes them attractive to investors. Instead of buying only stocks and bonds, for example, hedge funds make riskier plays. They may buy an entire company, restructure it, and sell it a few years later for a big profit. They may buy and sell stocks by the hour. They may sell stocks short, betting, essentially, that the stock will fall in value. They may dabble in derivatives, currencies, collateralized mortgage options or the swap market. Or all the above. All that risk, of course, doesn’t always lead to reward. Last year, about 5 percent of all hedge funds failed, according to Hennessee Group, a New York-based hedge fund consultant. A typical fund has about a three-year life span. But the hedge funds that succeed do so precisely because they are free of restrictions. That creates a double-edged financial sword for investors, because hedge funds provide an important function. The markets need them. Hedge funds sop up risk, which helps reduce volatility, and they employ tactics such as short-selling that make markets more efficient. A study by the Federal Reserve Bank of Cleveland last year found that hedge funds tend to reduce price volatility in the market. That’s why Paulson and his fellow regulators are reluctant to offer investors more than platitudes. For most of us, though, the best way to benefit from hedge funds is to stay out of their way. So take my advice. If you’re thinking a hedge fund may be the right investment for you, it probably isn’t.

Loren is right. Immediately go hide under your bed. Put your money under your mattress. Eventually you will be dead and the fear will subside!

It appears investors don’t agree with him: read (PDF).

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