Hedge funds . . .are alluring.
"There is now about one trillion dollars in assets spread out among 8,000 hedge funds. Year by year, hedge funds as an industry, show less in the way of good performance. It is now just as hard to pick a winning hedge fund as it is to pick a winning stock." Richard Russell July 18 2005

"What is a hedge fund? Supposedly the genre revolves around an ability to buy assets that will go up in price, sell ones that go down in price and if things don't move too much, to capture yield or carry, during the wait. Somehow, with the exception of shorting, that sounds like the standard active management dictum that has been around for nearly a half century now."*
"What defines a hedge fund (other than Lucullan pay packages) is the ability to go short as well as long, all aided by copious leverage." Lisa W. Hess, Forbes March 28 2005

"According to CSFB/Tremont's index of hedge-fund returns, investors earned 2.6% in the eight months to August [2004]."
In the same period, Canadian treasury bills were paying about 2.7% . In 2005, according to Barron's, the average hedge fund returned 7.61%...before taxes. One could buy BCE at $27 and change, and if BCE increaded by a dollar, beat the return on hedge funds.

"Ordinary Joes should avoid hedge funds" was the headline of a column written by Jon Chevreau in a special feature on hedge funds on October 17 2005. Chevreau's reasoning was simple: "Best are too costly, while affordable ones are too risky"
"Most investors should steer clear of hedge funds." ...'unless you have at least $5 million to invest' Forbes¹
"these days it is becoming harder for hedge-fund managers to make money. Those who invest the wealth of rich individuals, family offices and institutions using fiendishly complicated investment strategies face greater competition. New funds are set up almost every day: across the world there are now more than 8.000. More dollars are pursuing the same strategies, reducing returns for many. The costs of both fund-management talent and office space are climbing." The Economist April 1 2006
"fees: typically 1-2% of assets, plus a fifth or more of any profits the funds make." Economist October 9 2004
"Hedge funds are proper investments for only the most risk-oriented investors." Bill Gross
"They [hedge funds] will take bigger and bigger risks in an attempt to get outsized returns." Eric Reguly ROB July 4 2004
"Hedge funds in reality are just unregulated banks." Bill Gross
"To boost returns, some funds are using more leverage." Economist October 9 2004
"Three quarters of HFs use leverage" Grant's Interest Rate Observer.
Hedge funds can be manufactured in everyone's backyard: "barriers to entry in this business are nonexistent" Steven Galbraith
"hedge funds are a hotbed of questionable behaviour" Forbes May 24 2004
"a business rife with exorbitant fees, phony numbers and outright thievery" Forbes May 24 2004
Hedge funds are not allowed to advertise. Ask yourself why not?
"The funds often have lockup periods of one year or more." Bull's Eye Investing, John Mauldin, (Wiley 2004) C-20
Remember that after the 1973-1974 bear market, many hedge funds were closed.
"Many investment strategies employed by hedge funds are restricted and/or prohibited by the [American] Securities Act of 1933 and by the Investment Company Act of 1940 and thus may not be used in conventional mutual funds." Bull's Eye Investing, C-20
Hedge fund minimum investments are quite high.
"Hedge funds are not investment nirvana. Some hedge funds are not very volatile and extremely risky" Bull's Eye Investing, C-20
Hedge funds are private partnerships and they do not have to report their results to anyone. Hence, indexes of hedge funds offer poor performance ratings for them.
"Over the past few years, more [hedge] funds have been competing in the absolute-return or market neutral areas which is compressing returns." Catherine Harris, Investment Executive,November 2004
"Canada's major banks are calling for greater regulatory scrutiny of the burgeoning but secretive hedge fund industry..."
Report on Business - front page January 20 2005
"Remember how the Russian space program worked in the 1960s? The only flights that got publicized were the successful ones. Hedge funds are like that. The ones asking for your money have terrific records. You don't hear about the ones that blew up. That fact should strongly colour your view of hedge funds with terrific records." Forbes January 31 2005
• Michael Panzner: The nature of the hedge fund business encourages a trading approach.
• According the Report on Business (February 7 2005, front page), Portus, a provider of alternative investments (don't you love that expression), pays financial planners who refer business 5% of the initial investment, plus ¼ of an 18% 'performance fee' in addition to a 1% fee is the assets remain with Portus for a specified period.
• "Canada's growing hedge fund industry lack sufficient regulation and is rife with potential conflicts of interest and poor disclosure, says a report released yesterday by the Investment Dealers Association of Canada. Report on Business May 28 2005
• "Call it Hedge Funds' Dirty Secret: they often generate painful tax bills for investors." Barron's January 30 2006
• "Fat paycheques have prompted plenty of mediocre talents and cads to launch hedge funds, with predictable results." Report on Business magazine February 2006 p. 23
"Investors who put money into hedge funds managed by Norshield Financial Group will likely get back a maximum of 10 cents for every dollar they invested in the insolvent company." front page headline story R.O.B. February 22 2006 "Montreal-based Norshield, considered Canada's first hedge fund was founded in the early 1980s by john Xanthoudakis and it once boasted more than $1-billion in total assets."

Remember what happened to Long-Term Capital Management in 1998. The supposedly foolproof hedge fund was run by, among others, a Nobel laureate. LTCM tanked. Top Wall Street firms were owed $125 billion and had to be rescued by the Federal Reserve!

*Bill Gross of PIMCO addressed hedge funds in his August 2004 Investment Outlook

¹ The Sleaziest Show on Earth was the title of a six page Forbes article on hedge funds (May 24 2004)

Before you consider a hedge fund, read what Warren Buffet said about them at the 2003 Berkshire Hathaway meeting.

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