Debates are always fun... and I do agree that background/education plays a big part of it.

However, I've got a mixed background, having been a financial planner AND a successful stock broker. I've seen it from both sides, and there are always multiple solutions to any problem. However, I think Gary is coming from experience, where given the possible solutions to the scenarios given, the BEST solution happens to involve life insurance.

In my 10+ years in the insurance and financial services industries, I am *always* looking for the BEST possible solutions for my clients, regardless of whether I provide the product/services or not. As in this example, if someone could prove to me how a different plan/strategy would've worked better, then that's an option I would bring to my clients. The fact remains that until someone shows me a BETTER strategy, I'm going to recommend the strategy that has been and continues to be proven to work the most effectively.

This is why I am not against your hedge fund strategy, Hermes. In fact, alternative investment strategies are something I spend a lot of time researching and analyzing. However, at the end of the day, the average family that walks through my door has no business going anywhere near a hedge fund. It's not because of the potential risk/return characteristics, it's simply because their desire is to have a strategy that is NOT based on *Hope*.

I like you open-minded approach.

One thing to mention:

Not all hedge funds are based on hope. There are plenty that will consistently outperform.

To assume that all hedge funds and their strategies are based on hope is just a wrong piece of information.

I do understand why so many people associate inconsistency and high risk with all hedge-funds.

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It is not smart to play it safe but it is safe to play it smart.

Any time that you are relying on generating a certain rate of return in excess of guaranteed rates, you are planning based on "hope". You "hope" to earn those returns. If you don't, then things fall apart. If you do, then things work out as planned.

To say that hedge funds have little-to-no risk and can earn a high rate of return is equally as incorrect. Risk is defined NOT by the potential rate of return, but how an individual or family can effectively handle a downturn in their investments. There is a lot to like from hedge funds, but until one has a 20+ year track record so I can analyze their long-term performance, how can I recommend that someone invest in one for their long-term time horizon? You know why hedge funds typically don't have long-term track records? Because they either close before they collapse, or collapse entirely.

People associate inconsistency and high risk with hedge funds because of how they are structured. Hedge funds primarily use leverage to enhance returns. When things are going good, and hedge funds have cash flowing into the fund, returns are good. When investors start pulling money from a hedge fund, however, it creates a cascading series of problems. For one, they'll be forced to sell positions at inopportune times. For two, they may be forced to take considerable cash losses due to leveraged positions. For three, without the considerable return performance, investors will take their money elsewhere, causing further liquidations. The more leverage the fund uses, the more the cash problem is leveraged as well.

This is why when hedge funds collapse, they "blow up". It's like musical chairs, where you don't want to be the person left standing when the music stops. The last investors out typically lose their entire investment, because the company runs out of cash from paying the redemptions.

The average investor has no idea what they could be getting into. A sophisticated investor, however, can gain tremendous benefits from a hedge fund (but they also understand the risks of the strategies involved). The investor has to know the main strategies of the fund and all of the various risks involved. Several hedge funds had to close solely due to the subprime mortgage problems, because they were heavily leveraged in these investments.

I'm not saying that there is no place for hedge funds in an investment portfolio. I am also not saying that traditional mutual funds and ETF's don't have their own problems or deceptive marketing tactics. But at the end of the day, most investors do not belong investing in the vast majority of hedge funds.

You make some decent points and I agree on some of them but there are other hedge funds out there. Leverage is a great investment tool but you need to know how to use it otherwise it's horrible.

Personally, I do not consider leverage as added risk not do I consider global equity markets as risky. It's all about strategy and how you implement your strategy.

There are horrible hedge-funds out there and no investors should be with them, I agree with that but there are other hedge-funds or alternative investments out there in the market.

If you are an investor who needs to analyze a 20+ year performance (and that is no indicator for future performance) then the hedge-fund industry is not the right place for you.

The problems that you have mentioned apply to the bad hedge-funds, totally agree with you on that and investors need to be very careful with ANY funds.

Many mutual fund managers 'hide' behind their claim that they will manage risk and protect potfolios but they try to manage risk where there is no risk to be managed. The only risk a mutual fund manager brings to the table is the lack of knowledge of the fund manager.

Risk-Management, as the mutual fund industry practices, is equivalent to taking a fire department to a tropical island because the risk that a lightning strikes and a fire breaks out is there, it is possible and the fire department will be ready to extinguish a fire that may never be ignited. In the meantime, they are not available to extingish a fire that will break out at another location becasue they have to 'manage' the possibilty of this one. The whole city could burn down but that seems to be fine as long as the fire department manages the possibilty of something that never posed a risk in the first place.

The majority will disagree, and that is perfectly fine. That is my opinion on that topic and I have met only a very few selected individuals who have a similiar view on that.

Don't try to manage risk where there is no risk to be managed. It is never smart to play it safe (that is among the worst thing to advice to clients) but it is always safe to play it smart.

I beleive that every investor should be given at least the choice and then decide what is right for them rather then to just push them to the mutual fund indusrty.

If the investor doesn't choose to accumulate wealth (and then they should not invest in the first place) then a mutual fund is great as it will give the investor some exposure and really never take him anywhere for a few decades but they will feel like they participate in a great global economy as far as equity markets are concerned. It's just another illusion for the middle-class. Mutual fund were designed for the middle-class to try to keep them in the middle-class as long as possible.

Like I said, that is just my personal opinion about this and I understand that the vast majority will disagree with that point of view.

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It is not smart to play it safe but it is safe to play it smart.

The point of the 20+ years of performance was NOT the analyze historical performance, which is no indication of future results, but to make the point that NO hedge fund has existed for that long of a time period. Yet hedge funds are nothing new at all.

If that is the case, then NO hedge fund has had an investment strategy that has worked throughout history. Therefore, any current hedge fund investment cannot be reliably predicted to EVEN BE AROUND within the next 20 years. Furthermore then, since no one can predict when any current hedge fund will implode/collapse/close, the only logical conclusion is that my investment may be at serious risk at any point in time.

Mutual funds were NOT designed for the middle-class to try to keep them in the middle-class as long as possible, as you say. This is preposterous and assumptuous at best. Mutual funds were designed to give the small investor the opportunity to invest. Although a hedge fund is not defined by FINRA/SEC as a "mutual fund", in my view it simply is one, just with different investment strategies. The reason it is not defined as a mutual fund is because some of these investment strategies are not allowed or are not feasible with traditional mutual fund rules, which are ultimately there to protect investors. In fact, if a stock broker puts me into an inappropriate mutual fund and I lose all my money, I can actually take action against the stock broker. But with a hedge fund, there is no such protection/regulations in place.

I agree with some of your points. And I'm probably more open to alternative ideas than most. What I do disagree with is your utter lack of respect for the mutual fund industry that has provided wealth for many individuals, corporations, and institutions. You argue that a hedge fund is somehow better yet there are no facts to support it. Just as their may be a quality hedge fund, as you incur, there are also quality mutual funds.

As I said before, there are sophisticated investors that can benefit from having a hedge fund in their portfolio. Most of the readers of this board, however, are likely to be the average investors (simply due to mathematical fact, not that there aren't above-average investors, too). And to put mutual funds down, left and right, is simply creating fear of the mutual fund industry and capitilizing on those unsophisticated investors that may be greedy enough to ignore traditional methods and go right to a hedge fund.

Increasingly there are more and more ways for small investors to gain access to hedge funds, and with it there could be even more disastrous results. If a multi-millionaire loses a million dollar investment in a hedge fund, it's no big deal. If someone who has a life savings of $100k loses $80k in a hedge fund, or hedge fund strategy, then they are hurt more considerably. My concern is for those whose net worth is below the thresholds typically in place as the barrier for entry into the hedge fund world.

Ok, I can see the argument that a hedge fund is 'similar' to a mutual fund but with different strategies AND that would make it not a mutual fund anymore.

You are right, with hedge funds you don't have the protection of the mutual fund industry and that is very good because then a hedge fund would be exactly like a mutual fund and will have similar poor returns. Having said that it is not smart to play it safe.

I completely dislike and disrespect the mutual fund industry due to their poor returns. It is a joke, in my opinion. Mutual fund investors belong to the worst professional investors in the investment industry. A report on a well respected news channel in the investment arena had a report a few weeks and asked if the mutual fund indusrty is dead. The simple answer the experts came up with was yes it is. I think the mutual fund indsrty was dead the second it took of.

Mutual funds were designed for the middle-class and they will keep them there as long as possible. I agree that after 20 or 30 years they have created some sort of wealth but that time frame is ridiculous.

I disagree that it is only for sophisticated investors. I think every investor should at least have the option to decide if they would like to invest outside the mutual fund indusrty.

Yes, ther are very bad hedge funds out tehre and some have blown up but not due to the nature of it being a hedge fund but to very bad management teams in place.

You mentioned that if someone has live savings of 100K and loose 80K that would devastating. I agree but why would you have a 100K portfolio in one fund?

Doesn't make any sense. So the risk that you'll loose 80K is almost non existing and with a good management teamin place equals almost 0. Mutual funds try to manage risk where there is no risk to be managed which is why thy give you such bad returns to start with.

I meet more and more small investors that are fed up with mutual funds and want something else.

A mutual fund may create wealth over a long period of time but even for the small investor I would not exacrtly recommend that unless that is what the investor really wants. A mutual fund will give you the feeling that you are part of somehting but that is like dangling a carot in fron of a donkey.

The stock-price is the score card of a CEO and the ROI is the score cared of fund managers.

I want my investments to deliver high ROI, very limited risk and consitency and that is exactly what they do.

If you can point me to a mutual fund that has limited risk, consistency and a ROI of at least 60% please let me know. I am always open to suggestions.

Please do not say that 60% is not possible to achieve every year on a consistent base without a high degree of risk. That is simply not true. There may be only a very limited amount of companies and investors that achieve that but it is definately possible.

All I want is that an investor consider all options before wasting their time and money on mutual funds.

Yes, I do not respect the entire industry, that is one thing we can agree on.

If investors like mutual funds then they have plenty to choose from but a lot of crap doesn't make it any better.

It's all about definitions and preferences but if investors are not given a decent choice of options they won't be able to decide what is best for them.

The devolpment that more and more investors will gain access to hedge-funds and hedge-fund strategies is a great move, in my opinion. I seriously doubt that the truth about mutual funds will scare investors away from the industry but if an investor is scared of an investment in the mutual fund indusrty then they should not invest in the first place.

In the end it all comes down of what works for the investor and the majority, sadly, insists on being financially dependent and stick with mutual funds.

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It is not smart to play it safe but it is safe to play it smart.

Hermes, here is my biggest problem with hedge funds, and maybe you can clear this up for me...

My problem with hedge funds is that they are, indeed, performance driven (ROI as you say). Every hedge fund I have ever seen profits from "leverage". This could be leverage in the form of mortgages, options, commodities, long/short positions, etc. This is how typical returns can be magnified into much larger returns.

Since hedge funds are leveraged, they lack significant assets and cash positions to handle a severe increase in investor withdrawals. So hedge funds have to perform in order to keep the investors happy. But people are emotional, and the minute there is a panick, people start withdrawing their money. The managers have to liquidate positions in order to satisfy withdrawals, which then weakens returns, which then leads to more withdrawals, which then... SNOWBALL!

What makes the hedge funds you invest in any different? How do you combat the "implosion" as its called in the industry, that a hedge fund can go through? How do you say that hedge funds have little to no risk yet statistically there has not been a hedge fund in existence that has been able to sustain returns over any lengthy period of time? And when things go awry, you don't lose 20% like you might with a typical mutual fund... you could lose 100%!

How do you combat this?

Investing in a hedge fund is considered to be a riskier proposition than investing in a regulated fund, despite the traditional notion of a "hedge" being a means of reducing the risk of a bet or investment. The following are some of the primary reasons for the increased risk:

Leverage - in addition to putting money into the fund by investors, a hedge fund will typically borrow money, with certain funds borrowing sums many times greater than the initial investment. Where a hedge fund has borrowed $9 for every $1 invested, a loss of only 10% of the value of the investments of the hedge fund will wipe out 100% of the value of the investor's stake in the fund, once the creditors have called in their loans. At the beginning of 1998, shortly before its collapse, Long Term Capital Management had borrowed over $26 for each $1 invested.

Short selling - due to the nature of short selling, the losses that can be incurred on a losing bet are theoretically limitless, unless the short position directly hedges a corresponding long position. Therefore, where a hedge fund uses short selling as an investment strategy rather than as a hedging strategy it can suffer very high losses if the market turns against it.

Appetite for risk - hedge funds are culturally more likely than other types of funds to take on underlying investments that carry high degrees of risk, such as high yield bonds, distressed securities and collateralised debt obligations based on sub-prime mortgages.

Lack of transparency - hedge funds are secretive entities. It can therefore be difficult for an investor to assess trading strategies, diversification of the portfolio and other factors relevant to an investment decision. Lack of regulation - hedge funds are not subject to as much oversight from financial regulators, and therefore some may carry undisclosed structural risks.

On the flipside, I do see the benefits of Hedge Funds: Investors in hedge funds are willing to take these risks because of the corresponding rewards. Leverage amplifies profits as well as losses; short selling opens up new investment opportunities; riskier investments typically provide higher returns; secrecy helps to prevent imitation by competitors; and being unregulated reduces costs and allows the investment manager more freedom to make decisions on a purely commercial basis.

You make some very good points. Here are my answers to those things that you have mentioned.

Leverage:

This is one of the most significant investment tools available to hedge-funds BUT you need to know how to use this tool. Many hedge-funds will face margin calls which forces them to either borrow money or close out positions. This happens because margin is not applied in a sophisticated way. If not used properly then levergae will hurt the fund and its performance but if used wisely it will add no additional risk to the fund and its investors.

Short-Selling:

Bottom-line protection is key. Short-selling is another great tool used by many hedge-funds and as with leverage you need to know how to use it and have an exit strategy in place. The exit strategy will protect against heavy losses if the market turns against that trade (the same holds true for long positions).

Appetite for risk:

That depends on the management team and investment strategies set in place. Not all hedge-funds will put a alrge amount of money into such high risk investments and many only due as their are pressured to high returns in order to avoid margin calls because leverage is not used wisely. Those are hegde-funds I would consider risky and not recommend.

Lack of transparency:

I actually think that this is a good thing for the hedge-fund industry. I understand that this creates the current uncomfort with the indusrty but I strongly believe that if transparency will be forced onto hedge-fund that performance will suffer drastically. It is similar to asking the Coca-Cola Company to reveal their recipe for coke so every-one can put it together at home. Having said that, I do believe that hedge-funds should keep their investors informed on what is going on without giving access to the funds trading strategies. Investors in a hedge-fund should know where their money is being invested but not why and how. That's something the hedge-fund should keep to away from the public.

Lack of regulation:

I am afraid that if a hedge-fund will be regulated in the same way a mutual-fund is that performance will suffer. Like I said I do believe that the investors in a hedge-fund should be informed where their money is invested at all-times but nothing more. The government should only care about profits for tax purposes. Period. The lack and burden of heavy regulation is a huge benefit for hedge-funds.

Hedge-funds, especially with the wrong approach, may be risky but as I aslways say risk is a lack of knowledge. I agree that there are many horrible hedge-funds in the industry beacause they have a wrong approach to trading/investing.

Yes, every hedge-fund profits from leverage but as I said you need to know how to use leverage otherwise your losses could be more then 100%. If the fund lacks the assets then they are set-up to fail.

I hope that you understand that I can't give you any specifics of how to avoid those mistakes. I am not allowed to disclose how implosion is handled and managed. All I can assure you is that there are ways to do it and that you will see hedge-funds that will stick around for a long period of time. I can only comment on the two funds that I am involved with but can't give you any detailed information about those. I understand that you may be disapointed with that answer.

Hedge-funds are nothing new but in comparison to mutual funds they are fairly new. Give the indusrty some time.

I don't want to seem like I try to advertise anything on the boards here but if you would like a bit more information I can send you a PM and point you to our corporate web-site.

I understand why many associate a high degree of risk with hedge-funds or even with equity-markets. The snowball effect that you have mentioned will bother many funds but simply because they are set-up in a wrong way. Their goal to out-perform will cause poor trading decisions in many cases and the drive to avoid such a snowball effect adds pressure on the management team as well which may result in poor trading/investment decisions as well.

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It is not smart to play it safe but it is safe to play it smart.

Since this thread has morphed into something unrecognizable to the insurance industry it does draw a bright line and put a fine point on "Financial Advisors" coming from very different points of view.

The General Public needs to understand that ever since the Financial Services Modernization Act of 1999 allowing banks and investment firms to sell insurance the consumer has no idea of whether they are dealing with a "career" Insurance Agent with a securities license or a career Stock Broker with an insurance license.

Click HERE to read all about it.


A Stock Broker with an insurance license may recommend to a client:

"Let's leverage the equity in your home to short sell regardless of your appetite for risk because with the lack of transparency and regulation you will consistently earn double digit returns!!!"


An Insurance Agent may asked the same client:

Are you more concerned with the return on your money or the "return of your money?"


The above comments are general in nature and ARE NOT directed at any poster.
They simply illustrate the current atmosphere of "Financial Advisors"

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Gary Spicuzza, *SAFE
Copyright 1956
No Rights Reserved
*Self Appointed Financial Expert

This thread has moved away from the life-insurance discussion it once was.

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It is not smart to play it safe but it is safe to play it smart.