Introducing the hedge fund

When thinking of investing, here's another option

So which are better: mutual funds, exchange-traded funds, or individual securities? Proponents of exchange-traded funds will argue the majority of mutual funds have underperformed their respective benchmarks and that you are better off with “ETFs”.

Mutual fund proponents, on the other hand, will point out while not the majority; there are managers who have consistently outperformed their benchmarks.

Then there are those who prefer to actively manage their investments, but feel they can do so with lower fees through individual securities.

I could spend hours presenting the pros and cons of each, but the argument is academic. It is like asking which car would win a race: a BMW, a Mercedes, or a Nissan. You can have an opinion. But really, it depends who is driving.

When it comes to investing, not only does it depend on who is “driving”, it also depends on the markets. For example: no matter what your preferred investment “vehicles” were in 2008, there is a pretty good chance they were down. And again, regardless of what they were, they have probably since recovered.

In my opinion, the bigger issue is not how they differ, but rather their similarities, as they all share one characteristic. They tend to follow the markets. In a bull market, when things are going steadily up, that is a good thing. But in a sideways market, like the one we have been experiencing since early 2000, it can be frustrating.

Far more important is the decision on which asset classes to invest in. For example: bonds did make money in 2008, and it didn’t matter whether you were in a bond fund, a bond ETF, or an individual bond. 

In my experience the best advisors are those who focus on which asset classes to invest in. As far as how to access those asset classes, most good advisors will use a combination of the above.

As for which asset classes to invest in today: many analysts are optimistic the stock market will perform well going forward. But at the same time, there are concerns related to the potential economic impact of government debt levels in the U.S. and Europe, geopolitical risks in the Middle East, etc. 

Also of concern are recent indications of inflation, and potentially rising interest rates, which in general does not help the bond market. Then there is the risk in doing nothing — staying in cash, with the potential for inflation to erode your purchasing power.

What is the answer?

Diversification of course. But in my opinion you should be looking beyond the traditional asset classes of stocks, bonds, and cash equivalents, hopefully for investments with the potential to do well regardless of the economic situation.

People who know me have been hearing me talk about gold for years now (and more recently silver). These are investment themes I still like. But today I am going to present another option: hedge funds — funds that endeavor to make money regardless of what the market does.

Hedge funds may sound risky, but studies have shown that not necessarily to be the case. For example: an asset mix that includes a 15 per cent allocation to hedge funds has been shown to provide better returns with lower volatility than one that does not. In other words: better performance with less risk.

A word of caution: it is important to choose the right hedge fund, which can be an issue since the selection is limited for those who are not considered “accredited investors” — a term used to describe investors with a specified minimum level of net worth or annual income. Also, it is important to understand hedge funds are best used in the context of a diversified portfolio containing other asset classes as well.

Learn more about this topic at our upcoming presentation on hedge funds. To register call (250) 594-1100, or e-mail paige.renouf@raymondjames.ca, or register online at www.jimgrant.ca.

 

  Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd (RJL). This article is for information only.  Securities are offered through Raymond James Ltd., member Canadian Investor Protection Fund. Insurance and estate planning offered through Raymond James Financial Planning Ltd., not member Canadian Investor Protection Fund. 

For more information feel free to call Jim at 250-594-1100, or e-mail at jim.grant@raymondjames.ca. and/or visit www.jimgrant.ca.

 

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