Hedge Funds for Everyone? Don’t Hold Your Breath

Last year was a difficult year for the hedge fund industry, with returns down 6.4 percent, but the drop hasn’t stopped experienced professionals from moving away from big investment banks to set up their own firms.

Earlier this month, the Financial Times reported that a team of top traders at JP Morgan was making the leap to launch one of the biggest hedge fund start-ups of 2012. Several new Asia-focused hedge funds have also sprung up in recent months, attracting investors who are encouraged by the managers’ strong track records.

But investing in hedge funds is not for everyone.

The high fees they charge in return for the promise of substantial returns mean only very wealthy individuals or professional investors such as insurance companies and pension funds can invest.

“There are a few that deserve it but not all of them,” David Butler, founding member of Kinetic Partners told CNBC. “I think you have to be careful about which hedge fund you look at.”

Margie Lindsay, editor of the Hedge Fund Review said that institutional investors were putting a lot more pressure on managers to negotiate the fees.

But despite efforts to make the hedge fund industry less opaque, there are few signs that hedge funds will be investing money for the man in the street any time soon.

Butler said hedge funds were not looking for retail investors and would not be able to cope with an influx of retail investors.

“The product and many of the strategies are so complex they are not really designed for the retail market. Most hedge fund managers don’t want retail investors and most retail investors shouldn’t be in them,” Butler said.

Rather than selecting hedge funds themselves, individuals can get some exposure to hedge funds through pension funds, the custodians of their money, Butler said.

“Retail investors are better to do it through some other means and just accept, through their pension funds, they get some exposure,” Butler added.