Hedge fund returns are unenviable

NEW YORK – Hedge funds seem so glamorous, but small investors who lack the money for their minimum investments and hefty management fees shouldn’t shed a tear. Hedge funds’ recent performance just doesn’t look that stellar.

The funds have been in the news lately because of a June court decision that kept them outside the watchful eye of Securities and Exchange Commission regulators. The funds remain basically unregulated and their reporting standards are loose, to say the least, but their returns for the year to date still appear to be unenviable.

As of June 20, a Diversified Hedge Fund Composite calculated by Merrill Lynch was up 3.42 percent for the year to date. The average U.S. equity long/short hedge fund was doing worse, down 0.45 percent. That doesn’t look too great at a time when nearly risk-free three-month Treasury bills are yielding near 5 percent.

Hedge funds are free to take any risk that strikes their managers’ fancy. They can sell stocks long or short, borrow massively to amplify a trade and conduct arbitrage, in which they buy and sell a security in different markets to profit from the difference between prices. “Hedge funds often take large risks on speculative strategies,” according to Barron’s Dictionary of Finance and Investment Terms.