Hedge Funds Move To Cash, Undermine Potential Returns

Hedge funds, nervous about the fading magic of the markets, are moving into cash, the perfect investment for retiring school teachers.

The reasons that fund managers give, according to The Wall Street Journal, is "the risk of sudden cash demands has risen, as banks require extra collateral against loans and more investors pull their money out of hedge funds."

That would be the safe play, but is it the smart one? Putting capital into cash, which might earn 3% a year, undermines getting the 20% per annum results that make hedge funds attractive to investors who don’t mind the risk. At least they claim they don’t. Institutions understand, or say they do, that they risk losing part of their equity in a fund if it has to liquidate due to poor returns.

The hedge fund business has become famous for paying its top managers hundreds of millions of dollars for making their investors billions of dollars. They do this by taking horrible risks, high-wire men without nets. Hedge funds are still a small part of the total invested capital in the market because many investors have no taste for nerve-racking behavior.

Putting money into cash takes away part of the critical advantage of hedge funds. Safety, but its nature, cuts into the chance that they can out-perform the market.

Leave cash investments for money market funds.

Douglas A. McIntyre