Stay Clear of Hedge Funds

buyupside.com cautions investors about the shenanigans of the Wall Street Buy Machine that wants your money and to get it financial advisors and brokers will sell you any financial product at any price at anytime. Here's their scariest scheme to date - the so-called hedge fund for the average investor. Originally hedge funds were designed for very wealthy investors seeking above average returns, who could take their lumps when money managers goofed and lost money. But now Wall street is not simply content to fleece the rich. Many well-known brokerage firms are peddling hedge funds to everyday middle-class investors who are tantalized by the prospect of making big returns. Of course most hedge funds returns aren't spectacular so most investors are disappointed.

But the hedge funds keep on coming because they have cooked up a real money- making scheme for themselves. Here's how its works - hedge funds charge very high fees (even higher than mutual funds). For starters you'll pay a 1% to 3% annual management fee. And if that isn't bad enough, you'll pay another 10% to 20% on your profits. Of course the fund doesn't reimburse you for any loses. In addition, because most profits are short-term, you'll have to pay short-term capital gain taxes.

If the fees don't scare you off, here's a few tidbits about hedge funds that should convince you to just say no: many don't report their performance or keep audited books. So you have no way to check how much the fund is making or losing. Many are not regulated so you don't have the usual safeguards afforded by regulatory agencies. Just about anyone can manage a hedge fund - managers don't need formal credentials. If a fund goes belly up, it can simply be dissolved without repercussions - management is not accountable. A hedge fund can switch its investing strategy at will so what you buy may not be what you get.

Here is an article from Forbes Magazine that discuss hedge funds in more detail:

The Sleaziest Show on Earth (May 24, 2004 issue from archives at forbes,com)