Why Hedge Funds Are Easier To Emulate Than Join

For many investors, a hedge fund is a ship on the horizon that will never come to port. These mystifying funds seem full of promise and unimaginable wealth. In truth, much of the appeal of such an investment is based on its private nature rather than sound fundamentals.

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Hedge funds necessarily exclude most people for three reasons. First, rules 504, 505 and 506 mandated by the Securities and Exchange Commission limit the number of individuals who can participate in a hedge fund. Second, hedge funds nearly always command high minimum investments ranging from $500,000 to $1 million. Finally, hedge funds have a vested interest in shrouding themselves in secrecy. Why? These funds can avoid burdensome regulatory requirements by abstaining from the marketing of their investments to the public.

Despite these barriers, hedge funds have attracted over a trillion dollars. While performance varies across funds, many hopeful investors are beguiled by stories of incredible growth. Such growth does exist in some cases. The Medallion Fund from Renaissance Technologies generated an annualized return of over 35% for two decades. If there was a way to replicate the success of these dynamos without the hurdles of minimums, and limited access? The answer might be yes.

A Simplified Approach

Investors seeking to match the returns of a fund without necessarily replicating its holding can do so with two investments. The strategy is simple: invest half your cash into the U.S. Aggregate Bond Index and invest the rest in the S&P Global 1200 Index. Even after accounting for the minimal fees involved, over time “its performance starts to look pretty similar to the HFRI Fund Weighted Composite Index of hedge fund performance,” according to The Wall Street Journal.

This finding outlines how ordinary investors can match the long-term performance of the average hedge fund. Moreover, the strategy carries none of the risks inherent to hedge funds. First, liquidity is not a problem. Hedge funds often include a “lock-up” provisions requiring investors to leave their assets untouched for extended periods. Second, fees, expressed as expense ratios, are far less than the typical “2 and 20” structure seen with hedge funds. This agreement means the managers command 2% of the investor’s assets, regardless of performance and 20% of the profits after hitting a benchmark. Third, and perhaps most importantly, investors doing it themselves know what they’re buying. In many cases, hedge fund investors are limited in their access to the holdings of the fund.

Replicating Success

Those who wish to mimic a hedge fund move by move can do so within the KINFO system. Our in-depth analytics allows you to not only match the holding but to rebalance as new filing reports reflect compositional changes.

Our performance tracking across several funds lets users isolate the managers who outperform not only the S&P 500 but other hedge fund competitors. All of this is accomplished within a framework that puts you, the investor in the driver’s seat without unnecessary liquidity risk or excessive fees. Our graphical display also makes it easy to focus on the popular holdings among various hedge funds to better identify secular winners.

Leave the fees behind and chart your own path.

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