Investing in Hedge Funds

[slowtraveler]

What's the consensus on investing in hedge funds?

I've read Joshua Kennon's blog for years now and it's been quite helpful in helping me invest but my mutual funds and ETFs have made most of my capital gains. So I'm thinking to invest some money in the Kennon-Green Hedge Fund and let it sit while I keep building my portfolio after. I'm just a little worried about something like a Bernie-Madoff situation happening since I know hedge funds are less protected than publicly traded securities like MFs and ETFs.

[FIRE 2018]

Keep researching on the hedge fund you are interested in. Looks like the guy Joshua runs the Kennon Hedge fund. The fund's site is very vague. Hedge funds are run by individuals that are bigger risk takers than the average mutual fund manager. The hedge fund charges larger fees and can borrow unlimited amounts of capital to hedge their big bets. Looks like the customers need to have net worth between $500k-$10 million. A guy Kennon that runs a blog then later on runs a hedge fund managing rich peoples life savings and investments ? No thanks. I will pass on this one.

[unemployable]

Hedge funds aren't an asset class. Saying "hedge fund" tells you absolutely nothing about what it does or what sort of return profile you can expect.

My career was in hedge funds. Working for them, being a minor partner in one, analyzing some of the largest and most well-known.

The requirements have changed over the years, but most won't let you invest directly (ie, as a limited partner) without a couple mil in investible assets, and the minimum investments are in the $250k neighborhood. And that's where they start. I knew funds with $20 million minimums ten years ago.

Some structures may pool assets into one limited partner so that individuals can buy in with less and the fund would see it as a single investment. But this gives you far less control and liquidity and probably has an extra set of fees attached.

The glory days of hedge funds ended with the 2008 recession. They bounced back in 2009-10 but haven't done jack since. Now I'm generalizing them but back in the day they mostly relied on leverage, which has gone away, and structural inefficiencies in markets, which have been mostly arbitraged away. No one really needs them anymore, and many large managers such as public pension plans do just fine without them.

There are now mutual funds that replicate the most common equity-based strategies. I'd look into those.

[Dream of Freedom]

I've been following the blog as well. It's a shame that he had to take down all of the investment related posts when he started his wealth management firm. I am pretty sure that it is a wealth management firm not a hedge fund. I could be wrong. Joshua seems like a good guy, though I know less about his business partner/husband.

[jacob]

While I know some people personally that I'd be willing to pay "two and twenty" to run my monies, none of them are running their own funds. Some of them are working for one though. However, don't you need to be an accredited investor to play this game?

As it is, I'm content to DIY. "Hedging" is not magic(*) and the tools are more or less available at the retail level. It's really hard to beat indexing when the markets have momentum though. Only way to do that is leverage. Once markets enter a trading range (going sideways), I'd expect a renaissance of the long--short philosophy.

(*) At least not more than any technology that is 1% more advanced than whatever you know can be considered magic.

[unemployable]

However, don't you need to be an accredited investor to play this game?

Yes, and as I mentioned, this starts in the low millions of investible assets. "Investible assets" does not count primary residence or otherwise non-income-producing real estate or collectibles. I forget the exact numbers but you *don't* need to go through some sort of "accreditation" process as an end investor. It's self reporting.

As it is, I'm content to DIY. "Hedging" is not magic(*) and the tools are more or less available at the retail level.

At the wealth levels of the typical FIREr, this is correct. Options, short selling (or short ETFs) and plain old reallocationg come to mind.

It's really hard to beat indexing when the markets have momentum though. Only way to do that is leverage. Once markets enter a trading range (going sideways), I'd expect a renaissance of the long-short philosophy.

It's hard to beat indexing about 80% of the time. Equity beta is generally your friend. The issue then becomes why the hell you're paying 2 and 20 for it. I think the best strategy for an end investor is to identify a colossally mispriced asset class, such as US housing in 2006, then identify a manager/strategy who is best positioned to profit from a mean reversion in that asset class at reasonable cost and liquidity (say, within a few years).

[jacob]

+1

[trfie]

I researched hedge funds, and as has been pointed out, the track record is terrible (and the fees). I would, however, be comfortable investing if I was careful with asset allocation and much more importantly, based on an evaluation of the manager + whatever data I could find. Because they are going to be relatively opaque, so all you have to go on is your personal knowledge/experience in a particular industry + your assessment of the manager. I am personally very good at evaluating ppl. If I was not good at evaluating ppl, I would not touch it.

[7Wannabe5]

Less than 20% have a decent ML team in place. If you choose one that does, it could offer an advantage not available at retail level.

[suomalainen]

+1 to what unemployable said. and you need to be an accredited investor anyway, and if you're an ERE accredited investor, you don't need hedge funds.

we (my internal client) got out of hedge funds recently. as an "asset class", i think they've gone sideways for 10+ years (something like 3-4%) and that's even with hiring a hedge fund advisor that picked "the best" hedge funds for us. and then you throw the fees on top of that...would have done better in almost any other asset.

[IlliniDave]

https://money.cnn.com/2018/02/24/invest ... index.html

I don't know about any consensus, but it's a game I don't even have the buy-in for so it doesn't get a lot of my attention. Even if I did I think it would introduce risk I neither need nor want. I wouldn't advocate everyone dumping it all in an SP500 fund and closing their eyes and plugging their ears. I do think optimal for most is closer to that than hedge funds though.

[FIRE 2018]

I had huge positions in index mutual funds for 30 years ( I diversified and also had cash positions with 0% in bonds). I kept buying every month and bought more when market corrected (2000,2008-09). I did not have exposure in hedge funds. That's fools gold. Enjoying retirement and improved health.

[Nomad]

I had not considered Hedge Funds and I've had a little look.
Personally, it seems like abdicating responsibility of your financial future to the 'expert' but you don't know what they are doing with it.
I think everyone should learn enough about investigating for the amount of money they have at stake and plan their own future.
For me that means are variety of Funds and ETF's in a number of asset classes to provide some protection via diversification.
I dabbled in individual stocks with information from Stockopedia but that was still very nerve racking.
Currently, I'm in various stock markets around the world via funds, REIT's via funds and Gold via ETF. No bonds at the moment.