Coke or Pepsi?
One of the major criticisms of hedge funds is that fees are higher than those of traditional strategies. However, it's important to focus on the correct part of the equation. Are fees more important than performance? How much value would you place on keeping your fees at the lowest possible level if you knew that, after fees, you had a plus 6% or plus 8% return*, versus a negative return ranging from -0.85% to -31.57%**? What matters, of course, is the bottom line. Did your investments perform? Did you generate the kind of return you needed to? Did you meet your goals, and did the investment strategy used prevent sizable downturns in your portfolio? This is particularly crucial for investors who are living on the proceeds from their portfolio.
If an investment manager has only Coca-Cola or Pepsi to choose from, the opportunities are obviously limited. If your manager can seek opportunities in areas that are not well-covered, where the rest of the investment community has yet to arrive, then a skilled manager can potentially add return.
Which would you rather have: net +7%, after relatively high fees, or a net negative return, after relatively low fees?
~ Greg Stewart, CIO
*The HFRX Quant Direct and HFRX Merger Arb indices' respective 12 month performance ending January 31, 2016 - net of fees
**The SPDR S&P 500 and Commodities (GSCI) indices' respective 12 month performance ending January 31, 2016 - net of fees