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How Well Do Hedge Funds Work?

Seth Jentner06/30/2016

Everyone has heard of people who have struck it rich. With so many investment opportunities, most people turn to the investment specialists on Wall Street who promise to do the research necessary to help them strike it rich.

People expect their investment manager to predict economic trends and beat the market. Hedge funds charge high fees with the expectation of impressive performance. Sometimes they get it right. Unfortunately, too many times they get it wrong. Today, there are thousands of hedge funds, managing $2.7 trillion, with disappointing results over the past several years. Hedge funds had their worst performance in years in 2015, and so far 2016 hasn’t been any better. January was hedge funds’ worst month of returns since mid-2012.

So, what is the alternative?

Some try to avoid risk by placing their investments in cash equivalents, high-grade short-term bonds, or guaranteed annuities. This may mitigate short-term fluctuations, but the potential to earn long-term real returns above inflation is limited. This is called safely going broke.

Others employ global diversification in low-cost, passive index and asset-class funds. Yes, these investments will fluctuate in value. But, we believe that placing your financial future on the cumulative efforts of humans all around the world rather than on the ability of an investment manager to make the right investment bets will serve you better.

For more insight, listen to Jentner Wealth Management’s weekly podcast by clicking here. Or download Jentner’s white papers on The Four Cornerstones of Prudent Investing and The Active Versus Passive Investing Debate.