Summary: Are hedge funds the future? With equities hitting record levels and government bond yields still in the cellar, where can investors go to get the returns they need to fund their retirements, pay for college, or just become financially secure? Some say the future is in hedge funds—those lightly regulated investment pools that can go long or short, can use leverage (or not), and that utilize derivatives of various sorts to take all kinds of positions.Sometimes these bets work out fabulously, as when John Paulson famously bet against the sub-prime market in 2007 and came up big. But sometimes they fail: witness Paulson’s 65% loss so far this year in a gold fund. Ouch!In theory, hedge funds should be able to add value for investors—using massive fees to pay big bonuses to talented managers who can use the funds’ flexibility. But in practice these funds largely bet against each other, and investors still pay their two-and-twenty fees no matter how they fare.In the end, hedge funds will survive, because hope for the big win springs eternal among investors. But their managers aren’t magicians. The bigger these funds get, the harder it is beat the market.
