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Sound Advice: August 10, 2022

A Good Year For Hedge Funds After Lagging Badly For A Decade   

Investing in a hedge fund may well spark an interesting conversation at a cocktail party, but a closer look at these high-end opportunities tells quite a story.  First, you have to be an accredited investor to join in.  For the typical hedge fund, that means a net worth of at least $1 million, exclusive of your primary residence, as well as an annual income over $200,000 if you’re single, or $300,000 if you’re married.

Then there’s the matter of fees.  The typical fee for a hedge fund investment is 2% of assets managed plus 20% of the profits each year.  That’s a high price to pay, but one would hope that the ostensibly super-bright people running these operations could generate returns that justify the cost.

The reality is that they have not.  Indeed, average hedge fund returns over the latest 10 years have been less than half those of the Standard & Poor’s 500 Index. For that matter, they have lagged behind in every one of the last 10 years.  Since 2012, even in the best four years, the hedge fund index rose no more than 11%. By comparison, S&P returns were double or triple the hedge fund average in their highest years.

This year, however, the hedge funds have done better, slipping only 6.8% through midyear while the leading stock indexes were off 20% or more.  Among the very best was Bridgewater Associates’ Pure Alpha II fund, which cranked out a gain of 32%.  This extraordinary performance was largely the result of a hefty short bet against more than two dozen European companies, following reports that economic growth in the Eurozone was slowing due to rising inflation. The situation on the Continent was further exacerbated by the energy crisis resulting from the conflict in Ukraine. 

Credit where credit is due, but after an extensive span of disappointing returns, it cannot come as much of a surprise that there’s a rare occasion when one of their strategies finally works.

In 2020, Pure Alpha II fell 12.6%, while the S&P rose 18.4%.  In 2021, the fund was up 8% while the stock index was up nearly 27%.  When you add in the rest of the decade’s numbers and then subtract the hefty fees payable, it becomes clear that Pure Alpha II was not exactly a nonstop standout.

Yes, the fund’s European short positions have paid off handsomely so far in 2022, but one good year for Pure Alpha II or the rest of the hedge fund universe does not make up for many years of failing to deliver the goods.

If you’re still interested, be aware that this fund requires a minimum investment of $10 million and investable assets of $7.5 billion.

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883



Any questions?  Please contact me at


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