If the market goes up, the good stocks should rise more than bad, so gains on the good stocks should exceed losses on the short sales. If the market falls, the bad stocks should fall more than the good, so gains on the short sales should exceed losses. But profitable short selling requires superhuman timing, and the inevitable mistakes can be super expensive.
In 1999 and 2000, a number of hedge funds collapsed because they shorted Internet stocks that went on to soar. The hedge-fund managers were “early rather than wrong”, as the saying goes, but they still lost huge sums. After all, short selling turns the traditional market odds upside down. When you buy, your profit potential is unlimited and the most you can lose is 100%. When you sell short, the most you can make is 100%, but your potential for loss is unlimited.
Fund companies are still eager to launch hedge funds, especially now that new rules make it easier to sell them to the public. Hedge funds, long associated in the public’s mind with reclusive offshore millionaires, are a prestige item. In addition, they’re hugely profitable for the sponsors, due to incentive fees-investors pay extra if the fund performs well. Brokers are also happy to sell the funds and earn commissions. In addition, hedge funds trade heavily, and they usually trade through brokerage firms that sell their fund to investors. It’s a common investment situation.
The fund makes money; the broker makes money; sometimes even the client makes money. Of course, some investors lose heavily, due to the fees and risks. But, as they say in the investment business, “two out of three ain’t bad”.
Our advice: stay out. Rather than invest in hedge funds, we think you should build a portfolio of high-quality, mostly dividend-paying stocks and follow our TSI Network three-part Successful Investor strategy:
Most investors who successfully build wealth over the long term follow certain investing practices. Find out what they are in our FREE investing guide, The 10 Best Practices of Successful Investors.
“I’m a very old man and I’ve worried a great deal about a lot of things in my life, most of which never happened.”
—Attributed to Mark Twain, Thomas Jefferson, and various other historical figures
The stock market has gone through sharp up-and-down moves in the past… Read More
The top hedge fund managers may have lengthy streaks of success over time, but that success usually ends eventually
When one of the top hedge fund managers goes into a performance slump, media and investor reactions often leave us with an odd feeling. They make us… Read More
“Alternative investments” is the collective name for a diverse group of assets that do not fall into one of the traditional asset classes of stocks or bonds. Alternative assets can include real estate, private equity investments, commodities, infrastructure, hedge funds, collectibles, and even art and… Read More
Hedge funds often act as activist investors, and some have successfully pushed companies to make moves that increase shareholder returns. For example, Elliott Management, led by Paul Singer, is now one of the world’s largest activist funds with $35 billion in assets under management.
Elliott, and… Read More
Direct investment in private equity, hedge funds and so on was once just for institutional and high-net-worth individuals. However, alternative assets are now also available through a limited number of ETFs. While they focus on high-risk investments, many aim to use strategies to cut some… Read More
LISTEN:
CHEMED CORP. $319 (New York symbol CHE; Manufacturing sector; Shares outstanding: 16.1 million; Market cap: $5.1 billion; Dividend yield: 0.4%; Takeover Target Rating: Medium; www.chemed.com) operates two wholly owned subsidiaries: VITAS Healthcare… Read More
CHEMED CORP. $319 (New York symbol CHE; Manufacturing sector; Shares outstanding: 16.1 million; Market cap: $5.1 billion; Dividend yield: 0.4%; Takeover Target Rating: Medium; www.chemed.com) operates two wholly owned subsidiaries: VITAS Healthcare and Roto-Rooter. The two subsidiaries are in distinctly different businesses and have completely separate operations.
VITAS is… Read More
The best ETF selection strategies will focus on well-diversified funds holding top-quality stocks
In general, we like ETFs better than mutual funds. Their MERs (Management Expense Ratios) are typically much lower than those of mutual funds. That’s because most ETFs take a simpler approach to investing… Read More
When a hedge-fund manager goes into a performance slump, media and investor reactions often leave me with an odd feeling. They make me wonder, “Why does this surprise you?”
The media and the investors they quote seem to treat a hedge fund manager’s slump as a.. Read More
Short selling stocks is a speculative, “negative sum gain”. Profitable short selling requires superhuman timing, and the inevitable mistakes can be super expensive for investors.
Investors are often surprised when we tell them we see nothing inherently wrong with the basic concept of a hedge fund… Read More
Learn everything you need to know in 'The Canadian Guide on How to Invest in Stocks Successfully' FREE Special Report from The Successful Investor.
How to Invest In Stocks Guide: Find 10 factors that make your investments safer and stronger.
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