Why You Should Be Wary Of Investing In A Hedge Fund

From MarketWatch: Why hedge funds may not be right for you

They don’t reliably beat a plain vanila S&P 500 index fund.

Ever since the financial crisis broke in 2008, investors have been looking for a magic bullet. They want returns without risk, investment without turmoil, profits without fear.

One of the options is mutual funds that look or act like hedge funds. They often have labels such as “absolute return,” “total return” or “market neutral.” In recent years, a whole wave of these has hit the market. Lipper lists about 440 funds in hedge fund-type categories. Only one in four has been around for five years.

Are they any good? More important: Is the concept any good?

You can see the appeal to many shellshocked investors. After all, hedge funds—those secretive and exclusive funds open to the rich and big institutional investors—are supposed to have all sorts of tricks up their sleeves. They can bet against overpriced stocks, bonds and other assets; hold cash; use derivatives; switch between asset classes. At a time of perpetual turmoil across the markets, this has to be a good thing, right?

Alas, the answer is, “Well, yes, sort of. Sometimes.”

Travel to the heart of the hedge fund world: Greenwich, Conn., a picturesque town on the New England coast about 40 minutes from New York. Walk through downtown, and among the upscale restaurants and chichi boutiques you’ll see something surprising: boarded-up shops. When I was there recently, I counted 16 cases of “retail space for rent” and “long lease available” in six blocks.

The shine has come off the hedge fund industry. The boom days of the midzeros have long gone. In two days in Greenwich, I saw no Ferraris at all and only one Porsche—and it needed a wash.