A handful of hedge funds provide good returns to their investors. Most of their business comes from institutional investors like insurance companies, pension funds, university endowments etc. Some of their business comes from wealthy individuals. They have been restricted by the SEC from selling their services to investors with less than $1 million in assets. The SEC has ended that restriction. Consequently, some hedge funds will target that market. This raises questions about whether hedge funds are a good bet for most people.
This article, which is follow on to a critique of hedge funds in Bloomberg Business Week, explains why they may not be a good investment most people. On the other hand, they are very good for hedge fund managers. They get paid very well when they provide a good return, and the investor loses when the fund does poorly. The hedge fund manager is not required to return the fees that were earned during the good years. Most investors are better off investing in low cost index funds than they are in paying high fees to mutual funds that are actively managed. That is because mutual fund managers do not consistently beat the broader stock market. That logic also applies to hedge funds. The high fees paid to hedge fund managers is an even larger hurdle for them to overcome in order to provide a consistently good net return to investors.