What's going on?
Hedge funds are a special type of investment fund – and they have seen a huge decline in the amount of money that they manage on behalf of clients, according to a recent report.
What does this mean?
Hedge funds are a type of investment fund that is typically able to act with more freedom than traditional funds. For example, a traditional investment fund might only be able to buy stocks, while a hedge fund might be able to also bet against stocks. Contrary to popular belief, most hedge funds are trying to be less risky than traditional funds – in theory, they should make money whether the overall stock market goes up or down. It’s a complicated concept, but basically it means that hedge funds (generally) expect their returns to be higher than other funds relative to the riskiness of their investments. It seems, however, that investors are losing faith in the hedge fund model: investors took more money away from hedge funds in July than any month since the depths of the financial crisis in 2009.
Why should I care?
The bigger picture: High fees are harder to justify – for hedge funds and other investment funds.
Hedge funds typically charge their clients higher fees (for managing their money) than traditional investment funds. But both hedge funds and traditional funds have seen money taken away from them in favor of lower fee funds that have more straightforward investment strategies, i.e. simply tracking major US stocks.
For you personally: “Chasing” returns is a popular, and often futile, strategy.
It’s interesting to note that the last time investors pulled this much money from hedge funds was during the depths of the financial crisis – and right before hedge funds recouped most of their losses from the previous year. Investors often flock to or desert investment strategies based on past performance, which isn’t necessarily a good predictor of future performance.