One big difference between mutual funds vs. hedge funds is the initial minimum investment.
Most stock mutual funds require shareholders to have only a few thousand dollars or less. But many hedge funds only accept investors whose accounts range from several hundred thousand to millions.
Investors with that kind of money assume they're "buying" a superior investment strategy, and in turn expect to substantially outperform the stock indices.
In 2011, the Dow Industrials gained 5.53 percent, the Nasdaq lost 1.8%, and the S&P was flat.
How did hedge funds stack up in 2011? Well, Hedge Fund Research reports that the average fund lost 4 per cent through November 2011.
The HFRX Global Hedge Fund Index actually failed to participate in the early-August to late-September stock market bounce.
This dismal performance came after the $149-billion record inflow into hedge funds in the fourth quarter of 2010. Shortly after that record inflow, the February 2011 Financial Forecast said, "This return to a mass hedge fund fixation is a sure sign that market risk is rising...Once stocks turn lower, many hedge funds will fall by the wayside."
A few months later, the June Financial Forecast stated:
"The hedge fund industry is a by-product of the liquidity boom that carried finance higher from 2000 to 2007. As [the downtrend] continues, this index will surely fall back through its December 2008 low... Eventually, the survival of the industry itself will become an open question."
Hedge fund assets are already starting to dwindle:
"Funds under management at 17 fund managers, who account for 17% of the global total, fell about 10% at the end of the third-quarter to $3.96 trillion..."
Besides 2011, only two other calendar years since 1990 have seen hedge funds in negative territory. What do we see ahead?
"The reports of hedge-fund dysfunction are starting to appear; the size and number of disruptions will multiply many times in coming months...hedge funds will find themselves unable to get out from under troubled assets, as their source of funds dries up and eventually reverses to a disastrous outflow at just the wrong moment."
Financial Forecast, October 2011
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