Are active money managers worth the cost? Answer: No [INFOGRAPHIC]

Investing in hedge funds is not a conversation I usually have with teachers! However, new products are being released in the mutual fund market which make it easier to invest in hedge funds.

If you’re not aware, a hedge fund is a private investment “club” available only to people who have large amounts of money to invest (minimum investments can be $250,000). They are expensive to own (annual expenses can run over 2% per year) and managers can take around 20% of the profits they have made when you withdraw your money (or even at the end of every year). They are typically unregulated, which means the manager of the fund can do whatever they like. The main selling point: “We can beat the pants off the stock market.”

But it doesn’t just stop here. Lots of mutual funds are classed as “actively managed”. Unlike a hedge fund, these are cheaper to own and are regulated. However, an “active” management team can choose to change the investments inside this fund whenever they please. The reason for doing this is to try and get greater returns, or avoid losing money when the market goes down. Sounds great in theory – but it rarely works in a consistent manner. At Finance for Teachers, we don’t agree with this philosophy at all. We believe that it is hard to consistently beat markets (whether US or otherwise) and the cost to try and do so is prohibitive. You can read about our philosophy on our Investment Services page.

   


 

However, a recent infographic (and if you are a frequent reader at Finance for Teachers, you know I love infographics! – One / Two) shows that these funds aren’t really as good as they claim to be:

Hedge funds are better?