Fat Cat Spending

Who Needs A Hedge Fund Anyway?

Returns are meager or negative, capital flows are slowing and hedge funds appear to be folding at a record rate; so monied investors might be prompted to ask ... who needs a hedge fund anyway? 

“Institutions have taken over the hedge fund space," saysMorningstaranalyst Nadia Van Dalen, adding they are intrinsically better able to identify the best-performing funds and then pour money into them. “The high net worth investor is at a worse disadvantage now [than in the past].”

So much for letting the individual investor play with the Big Boys.

“[High net worth] retail investors shouldn't be in hedge funds,” says Adam Patti, CEO of IndexIQ, citing “exorbitant fees, little transparency" and lock-up periods.

Since Patti’s IndexIQ recently launched what it calls the “first no-load open-end mutual fund designed to replicate hedge fund performance”, he may not be the most disinterested observer. But his qualified assessment is shared by enough others. 

It's part of what might be called a modest rethinking to the golden age of hedge funds. In July, the industry posted its worst monthly performance -- a loss of 3.07 percent -- since Morningstar has been keeping data. June was also negative.

Performance In The Spotlight

First-half performance, according to another tracker, Hedge Fund Research, was negative for only the second time in almost two decades while

inflows slowed dramatically.

"Delivering consistently good risk adjusted returns that also maintain a very low correlation to stock and bond markets is not an easy thing to do,” former Morgan Stanley CFO-turned hedge fund manager Phillip Duff told CNBC in a rare TV interview in late July. (Watch the complete interview here.)

Based on the performance of the Henessee Hedge Fundindices, the average hedge fund has outperformed the Dow Industrials in seven of the past ten years,

Average, however, pretty much describes the performance of most of the 8500 hedge funds and funds of funds tracked by Morningstar.

“Hedge fund managers make themselves out to be alpha managers, but what you’re getting in the average hedge fund is beta, what the market yields,” says Van Dalen, who’s covered the industry since 2005. “Alpha managers are few and far between.”