Read this first if you Are thinking about investing in a fund


The article I wrote on Business in 2006 for the Report was one of my very controversial. It contested the value of funds. Not how they invest, but instead their prices, lack of transparency and, generally speaking, client-unfriendliness.

Have had their ups and downs. They have grown significantly — the latest tally is $3.2-trillion (U.S.) — but have come under increasing scrutiny. Investors are saying, “I purchased the sizzle, but where’s the beef?” In general returns haven’t justified sophistication and the fees. As it happens, the customers have been done better than by the managers.

Nonetheless, hedge goods are currently creeping into portfolios of investors. I am referring to investment products where the manager shares in the proceeds, or what I fondly refer to as “fee impaired” funds.

These fund managers must do things that are hard and different to justify higher prices. That might mean using shorting leverage securities, and various kinds of hedging and arbitrage. Furthermore, managers point out that their interests are better aligned by performance fees . “If you do well, I do nicely.”

You and your advisor have some work to do, if you are considering a product for your portfolio. You will need to learn how it works, what the dangers are, how much you are paying and, importantly, who you are dealing with.

Resources of yield and risk

First off, you need to understand where the gains are anticipated to come from. I mean the fundamentals, not the particulars. The plan should make sense and fit with the experience of the manager. Shorting stocks, using leverage and benefiting from illiquidity require skills and temperament.

My spouse at PHamp; N, Bob Hagerreminded me to stocks and bonds, it comes down with any investment product. That is what drives returns. Well, he is right about that, but with strategies timing and the character of risks and the returns can differ. And of course that the selection of outcomes broadens.

Funds have risk profiles. A good guideline is, then it has risk if the product promises returns. If the advertising materials promise high returns with little if any risk, warning bells should go off.

How impaired?

It is important to know whether the manager is going to be rewarded for performance, or just because markets move up, although the fees could be difficult to understand as the investment plans. If money is lost by him, is he needed to make this up before collecting performance fees?

In a finance, the performance fee does not kick in until after a return was achieved. If the manager gets over the hurdle rate, as it is called, he then shares to the tune of 20 percent, usually in the yield . Many funds do not have a hurdle rate. To put it differently, they get 20 percent of the dollar earned.

Another element to search for is what is known as a “high-water mark{}” The HWM expects before performance fees are collected, that the fund accomplishes any losses. The HWM ought to be perpetual, even though some funds have an annual reset (they get to start fresh after one year). If the HWM is not perpetual, it is a deal breaker. I’m unwilling to provide all the while to the manager.

The bar is greater

I have had experience with funds . If the manager and finance structure is correct, they may be a complement to the majority of your resources, which is at the end of the spectrum — transparent and clear price.

Hedge funds have to be held to a higher standard, to warrant customer unfriendliness. Before you write a cheque, be sure to understand how much you are paying and how the fund works, what the dangers are. You need some assurance that you will succeed if your boss does.

Tom Bradley is president of Steadyhand Investment Funds Inc..

Also on the Planet and Mail

Money Monitor: Slimming beta ETFs down (The Canadian Press)

No Comments Categories: Plan your future

Leave a Reply

Your email address will not be published. Required fields are marked *