Setting aside the $2.13 trillion under management, there is a certain mystique attached to hedge funds and the people, like George Soros, Carl Icahn, and John Paulson, who manage them.
At one time, hedge fund managers were counted among the “Masters of the Universe.” Most of the “rich lists” include no small portion of these types.
But all of these big money managers ultimately live or die on performance.
If their fund takes a dive, the manager might not even draw a paycheck. Meanwhile, the wildly successful managers are compensated far and above what the average Wall Street or London über-banker receives.
But this year, the hedge funds have collectively lagged behind the S&P 500 by about 10% according to Goldman Sachs. Analysts there credit this underwhelming performance to overly bear-ish fund managers who like to short stocks like Johnson & Johnson (NYSE:JNJ), only to see the stocks head the other way.
Part of the allure of the hedge fund world is that they are usually open only to “accredited investors,” certain high net worth individuals who meet the criteria, laid out in SEC Regulation D, rules 505 and 506, for investing in hedge funds [emphasis added].
Here are just a few of the criteria:
- a bank, insurance company, registered investment company, business development company, or small business investment company;
- a director, executive officer, or general partner of the company selling the securities;
- a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;
- a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
- a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
A Poor Man’s Hedge Fund
As for the rest of us, who may not be “accredited investors?” We’re on our own-but not completely.
There are certain ways to taste the rarified air of the hedge fund crowd.
There is an ETF, the Global X Guru Holdings Index ETF (NYSEArca:GURU). Global X’s methodology involves scouring the numerous 13F forms that fund managers are required to file. The fund searches for the best performing holdings among the hedge funds – the managers’ top picks – with the least turnover, and takes you along for the ride. It’s been called the “poor man’s hedge fund.”
GURU has been around a little less than a year, and has beaten the S&P 500 by a respectable 18 percent.
It’s not bad, but their track record is thin on time and the truth is there are ways to do even better…