Investors who put money in mutual funds that use hedge fund strategies are courting disaster or at least disappointment, according to Lewis Braham (“Serving Up Disappointment,” Bloomberg Markets). Hedge fund-like mutual funds are “today’s hottest yet least rewarding strategy,” he says. They use market-neutral, long-short, managed-futures and other alternative strategies. The long and short of it is that they cost more and may return less than an index fund. Expenses can be as high as 6.7 percent.
Highbridge Statistical Market Neutral mutual fund is a case in point. The fund was created by JP Morgan hedge fund managers, and holds $866 million in equal portions of long and short positions, according to the article. During the seven years from inception through March 2012, its annualized return was 1.2 percent ? compared to 4.1 percent for the S&P 500 stock index. That dismal return put it at the head of the class of 255 hedged U.S. mutual funds.
Alternative investments have been pitched as a panacea to investors who have lost faith in traditional stock and bond investments. Observers say the flow of investor funds into alternatives has begun to slow, however, due to poor performance, high fees, valuation issues and illiquidity.
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