The U.S. Securities and Exchange Commission recently eliminated a long-standing rule prohibiting hedge funds from advertising to the general public—a move critics say is a blow to investor protection. But it’s only a risk if you happen to be rich and foolish.
Most unsophisticated investors wouldn’t be able to place their money with a hedge fund anyway, given SEC requirements that a person have at least $1 million in assets (not including a house) or income of at least $200,000 in each of the past two years to be eligible to invest.
And those who do qualify should know better: Several studies have shown that hedge funds, which can use more risky trading strategies to try to earn big returns, have collectively underperformed the stock market over the past decade. For one thing, the industry charges investors massive fees, known as “two and 20,” or a two per cent flat fee on the assets invested and 20 per cent of the returns. That’s a high mountain to climb before profits are realized. Moreover, it’s hugely difficult for a hedge-fund manager—any hedge-fund manager—to consistently outperform the market by a wide margin, given that every winning trade necessitates that someone else has made a losing one. Of course, that’s unlikely to appear in any advertisements.