These are highly nervous days for hedge funds. The days of investing profitably with these seem to be over. The old tactics of these funds do not seem to work any more. There might be a need for these funds to reinvent themselves.
From Obscurity To Fame
The most popular sectors of hedge funds which brought in very high returns for them are no longer lucrative. These included commodity stocks, energy sector, uranium, gold and real estate. Of all the oil and uranium stocks were simply fabulous.
Hedge funds were quite obscure till 2002. Not many investors were aware of them or had faith in them. These fell in the area of high yield growth stocks.
Investing back in 2002-2003 was much safer as the stock markets were in the grip of a severe bear market and the value of stocks had fallen by almost half. Energy and commodity stocks were extremely cheap and there was not much downward risk at that time. That is how hedge funds came into prominence.
The basic factor bringing in huge profits to them was the principle of leverage. They believed in high borrowed money in order to play the market. Since the stocks were cheap and there was not much scope for further losses, there was more to gain than to lose. They used to turn small gains into bigger returns and fees.
Following the bear market of 2002, the hedge funds which invested in commodity and energy stocks raked in huge profits. This gave tremendous popularity to them. Now it is a $2 trillion dollar industry.
Hedge Funds In Doldrums
Commodity and oil stock prices seem to have matured. There is less likelihood of the huge returns that they usually used to bring in. There is danger of their falling down and so many of them may be risky.
The recent credit crunch, mortgage crisis, banking woes and recession have taken a heavy toll of these funds. Credit Suisse / Tremont Blue Chip Index which judges the performance of the best hedge funds has been mostly flat since the second half of 2007, with most of their growth of 7.4 percent coming from the first half of 2007.
However, Credit Suisse Index may not be quite representative as numerous hedge funds easily get deleted from this following their downturn.
The Dark Side of Hedge Funds
One major problem with hedge funds is that unlike other mutual funds, most of them do not publish daily volumes, Because of this; it is difficult to measure their performance as regularly as in case of other funds. This renders it extremely difficult to make any informed decision.
The second major problem with them is that they charge very high fees, usually 20 per cent of the profits. May be with reduced profitability, this may come down.
Thirdly it is also supposed to be doubtful if the statistics they report are reliable. They are believed to be inflating their performance to a great degree.
The Final Word
It is all a question of investment timing. Last few years were extremely lucrative and any investment in prominent sectors of commodities and energy brought is substantial returns.
Hedge funds are risky. They are like High Yielding Investment Programs. Therefore, it may not be advisable to play with them any more.
With the credit squeeze and banks and brokerage firms having become very cautious in lending, hedge funds may no longer be able to use the strategy of leverage. The stock markets are entering into an uncertain future.
Any investment in hedge funds does not appear to be as transparent and high yielding. So at best many investors may like to avoid them.
The author has background in business, economics and finance. He is presently researching in finding ways to make money and working on the following website and blogs: