A reader asked for my opinion about whether it makes sense to put 3%-5% into a hedge fund like Super Fund or another low minimum product from SP Trader. I have not studied either company or either product line so this post will have nothing to do with these specific funds.
The idea of trying to add performance to a small amount of your portfolio with something that gives you the chance for a monster home run is far from the dumbest thing you can do. It may not be right for a given investor but it is not an insane idea.
One thing about hedge fund investing that could be a negative is access to the capital invested. If an investor as $500,000 and commits $20,000 (4%) to a hedge fund product this might introduce a fair bit of volatility overall. Let's say in year one the stock market is up 2% but the $20,000 grows to $60,000. Now this investor has 10.5% in the hedge fund. If the hedge fund can triple one year it can cut in half the next. The example may be extreme but the point is that it could be difficult to maintain balance in your overall portfolio.
A driver behind the question was the reader's doubt in his own ability to successfully speculate with a small portion of his portfolio. Is this even a worthwhile intention, speculating with a small piece of your portfolio? Here again there is no yes/no answer that applies to everyone. I do not set aside a little bit of client money to speculate with as I don't think it is a strength of mine either.
Every so often for my account I will see something that seems obvious to me and so I will do a quick trade. The key, I think, with this is that you must sell out of a quick trade as soon as it fails. Fails is obviously subjective. For example if you like to try to game stocks before they report earnings with the intention of selling into the report you should sell as soon as the earnings print. If you are disciplined with your trading, and you do in fact trade, you have a good chance of having some success. A lack of disciplines seems to be one of the biggest problems that people have.
Back to hedge funds, one concept that I adhere to is keeping things simple. While simple is also subjective I don't think that taking on hedge fund exposure is a simple endeavor.
The reason my answer seems wishy washy is that there is no absolute answer. I rail on about OEFs but obviously some of them are good and plenty of people think they are positively the best way to invest. Just because I disagree doesn't make them wrong. Ditto hedge funds.
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3 comments:
Of course, the way to deal with profits is to take them out from time to time and reinvest them in something safe. The commodities broker that I know suggests just that with profits generated from his trading and directing them into buying physical gold & silver.
Larry, Scottsdale
I have to say, I do not think that the Super Fund is a hedge fund, it is a fancy marketing gimmick that charges fees much higher than a hedge fund with much more volatility. Read the prospectus. Round turn commissions can get quite high which sets your effective fee load somewhere much higher than the 2 and 20 that most hedge funds charge. I like hedge funds but Super Fund is not one to own.
Traderaaa,
If you know of hedge funds other than Super Fund with a low minimum investment (about 50K) that you do like, please share.
Roger, re maintaining balance in the overall portfolio due to the wild swings in the value of the hedge fund - this would not be a problem as I evaluate and rebalance my portfolio once a year anyhow. Thanks for your perspective - always appreciated.
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