Just when you thought they were out, they pulled investors back in. According to recent data from HFR, hedge funds had a great month in January, beating equities and delivering significant positive returns. Just a month ago, the media were asking if hedge fund managers still had it after performance in 2013 did not match the broad market index. The industry, according to these experts, was in big trouble.
Wrong again! Comparing investments that go long and short the market to investments that only go long is like, well, comparing apples to oranges.
Simply put, if managers are hedging, then they should not beat the market in an up year. That is not where they add value. Hedge funds add value when the market fall, since hedging protects the portfolio from losses. So should one only invest in hedge funds when markets are falling and the rest of the time invest solely in index funds? Well, that would work if you knew for sure when the market was going to rise and fall. By the way, if any of you do know exactly when the market will rise and fall, please get in touch with me ASAP.
It is impossible to predict the market. It is not, however, impossible to create a diversified investment portfolio that zigs when the market zags. This is where hedge funds come into play, and while some may be critical of last year’s numbers, remember that past returns are not indicative of future performance.
For students of Ben Graham, I highly suggest reading the Jason Zweig column in the last Wall Street Journal, titled “Most Expensive Place to Find Out Who You Are.” It provides insight into figuring out what type of investor you are and, more important, gives you a reason (not that a reason is necessary) to read Graham’s book The Intelligent Investor again.
I apologize for not blogging over the last couple of weeks and I appreciate the queries from readers asking for blog posts! What I’ve been doing is working hard on Operations for Alternatives. The event is less than a month away and there is quite a bit to do. But fear not, dear readers, I expect to post regularly from this point forward. If you have not registered for OFA or want additional information, go to www.ofa-america.com. A few tickets are still available.
In the meantime, stay warm, stay out of the cold, and read that column by Jason Zweig.
THINGS THAT DRIVE ME CRAZY:
The snow is it this week. I am sick and tired of the snow, the ice and the cold weather. Enough already…