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Hedge funds see worst year since financial crisis

Hedge fund performance over the past three months hearkened back to the bad old days of the financial crisis.

Poor performance weighed heavily on the industry, causing the biggest net loss in capital since the fourth quarter of 2008, according to data released Tuesday by HFR. The $95 billion decline pushed total industry assets further from the vaunted $3 trillion mark.

As measured by the HFRI Fund Weighted Composite Index, the industry saw a 3.9 percent performance drop in the third quarter, taking the barometer into negative territory for the year at minus 1.5 percent. At this pace, hedge funds will turn in their worst performance year since 2011.

The bright side is that the industry actually outperformed the equity market through the end of the quarter, as the S&P 500 (INDEX: .SPX) fell more than 6 percent through the first nine months. The S&P has since rebounded, jumping 5.6 percent in October to pull within 1.5 percent of breakeven for the year.

Kenneth J. Heinz, HFR’s president, said funds have followed suit and should be able to reverse the earlier money drain.

“Recent market turmoil has resulted in increased risk aversion by investors but has also created opportunities for innovative approaches in key tactical and strategic areas,” Heinz said in a statement. “Funds of all sizes have already experienced a powerful performance recovery through mid-October, which is likely to drive industry capital gains into year end.”

Investors actually have been putting money to work in hedge funds this year.

Total inflows came to $47.9 billion in the third quarter, offsetting $42.3 billion in redemptions for $5.6 billion in net flows, according to HFR. Event-driven strategies have performed poorly, losing 5.1 percent in the quarter and 2.85 percent for the year, yet saw inflows of $5.4 billion.

Equity strategies have received the most cash, pulling in $23.8 billion for the year and $2.4 billion for the quarter despite losing 2.3 percent through the first nine months.

The best performing industry strategy has been volatility, which was up 5.5 percent, while Latin America (down 20.2 percent) and energy (off 12.4 percent) represented the biggest losses.

 

(Source:  finance.yahoo.com)

Trading School: Individual funds

If you have the money available, you can start investing straight away in good quality individual ETFs and then in index funds in mutual funds. An index fund is a fund that tracks a broad market index or basket of stocks, bonds, and other investments (learn more here). (See the summary of a mutual fund to understand how they work.)

Individual funds are suitable for early-stage retirement investors, because they may have more space in their investments and they don’t pay a management fee (since your contributions are managed by the fund, and you pay you through regular brokerage fees). And the tax-free early distributions of the ETFs allow you to put off the decision of when to sell your portfolio. However, if you don’t have time, you should consider whether a more conservative ETF (such as a simply managed equity fund) or a more diversified portfolio will provide better value.

The bottom line is that investing in a specific stock or basket of stocks at any given time is no guarantee that it will perform better than other stocks at that time. When you decide which stock or basket you’ll buy, you should be aware of potential long-term risk, including that of a particular stock or basket falling in value or another company outperforming the stock or basket. And at any point in time, if a particular company has a bad quarter, then you may get into trouble if you lose money. (Not a good reason to buy stocks, right?)

Use good management.

Good managers are some of the best hedge-fund or mutual fund investors you can find. A management fee is the sum of the compensation of the fund’s head of investment, other employees and outside advisors. By reducing the costs of investing, management fees reduce the risk that you could lose money when you invest. Of course, your investment should be diversified, so that the percentage ownership of each stock or basket is based on the average ownership of all stocks and baskets in the market, not just the best individual company.

Work with a bank.

Typically, when people buy a stock or ETF for the first time, they are quite confident that they can beat the stock’s performance or that the stock will rise in value. But sometimes even well-informed investors can get it wrong, and they should work with a qualified professional, who can monitor the stock for its value and then deliver a good price on that value when the time comes.

This is especially important for things like bonds, which may have long maturities and not yet yielded any money.

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