What the Average Joe Can Learn From Hedge Funds

By Markets Fool.com

In this segment of Motley Fool Answers, Alison Southwick, Robert Brokamp, and former hedge fund manager Ron Gross discuss asset allocation methods that reflect the lessons of hedge funds, because real hedging is a good idea for any investor.

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A full transcript follows the video.

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This podcast was recorded on Aug. 30, 2016.

Alison Southwick:So for the average individual investor out there listening, what -- activist hedge funds, or hedge funds in general, is it just good theater? Is there a lesson to be learned here? The headlines are telling me that they maybe should not be investing in hedge funds.

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Ron Gross:You have to be careful and invest in one with a track record. There's so many start-ups out there that I would probably say to stay away from. I know that Bro has asset allocation models and recommends certain types of investments and certain percentages.

A lot of investment advisors will say to affluent clients, "I think you should have" -- let's just make up a number -- "5% of your portfolio in what's calledalternativeinvestments." That's usually something like a hedge fund, or a private equity fund, or a venture capital fund, which all of these partnership structures are. Is it necessary to have that allocation? I believe it is not. I don't know if you have a thought on that, Bro.

Robert Brokamp:Yeah, and that's about what I recommend in our model portfolio, so maybe 5% to 10% in some sort of alternative strategy. It can be as simple as real estate, like real estate investment trusts, but something a little different than standard stocks and bonds.

The problem I have with hedge funds is if you're looking at a hedge fund that's basically just a stock-picking mutual fund with higher fees, the stats show they're probably not going to do a good job for you.


Brokamp:It's more interesting, to me, when you're looking at a hedge fund that really is doing some sort of hedging or adding some diversification to a normal stock-bond portfolio.

Gross:The market, technically, should weed out the folks that are just stock picking, because if you can get stock picking at a mutual fund for 1%, but you've got to pay 2[%] and 20[%] at a hedge fund, theoretically that hedge fund, if it's not doing something special, should not be able to raise capital. Is that always the case? No, but the market really should take care of that over time.

But for the average investor -- for the Fools out there -- I think you can live a perfectly successful, normal investing life never even touching a hedge fund. Individual stocks, index funds, mutual funds, perfectly acceptable, and I don't think, really, the ambition should be, "I've got to get wealthy enough so I can put money into a hedge fund."

Southwick:It sounds like the easier path to get wealthy is to just start a hedge fund, rather than invest in a hedge fund.

Gross:Be careful what you wish for. It's not so easy.

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