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Hedge Fund Frenzy

Hedge Funds are a bit funny; you have to paymutual funds, but at a much lower broker's
3 to 4 percent for management fees and otherfee. Look-alike funds mimic ETF's
fees, plus about 20 percent of the profit,relationship to mutual funds, by running
yet more and more people are crazy aboutprofiles of the investment strategies of
them. For many years average hedge fundvarious hedge funds and mimicking them. Then
returns were 11 percent according to Businessthe broker fee is only 1 or 2 percent, and
Week, but now the returns have become lowerthere is no whopping 20 percent profit fee.
on the huge amounts invested in hedge funds.These look-alike funds are definitely around,
Maybe there is too much competition. Manyand if you ask your broker about them or do a
smaller investors are involved in hedge fundsfew Google searches, you can get them.
through fund of fund groups, which require asAlthough hedge funds total about $1.5
little as a $25,000 investment, as opposed totrillion in invested funds and mutual funds
a $1 million investment directly in a hedgetotal much more money, about $8 trillion,
fund. A fund of funds is a mutual fund thathedge funds have an increased weight because
invests in several different hedge funds.of their use of leverage. At a ten to one
This gives an opportunity for smallerratios the effective investment power of the
investors, but the fees are higher, sincehedge funds can be greater than mutual funds.
there's one more level of management to deal
with. Altogether there is believed to be $1.5To tell you the truth, if you read the
trillion in hedge fund money in about 8,000financial press, it is a bit of a mystery
different hedge funds. They are underwhat exactly the frenzied attraction to hedge
increasing pressure to be regulated after thefunds actually is. They are invested in a
largest collapse of a hedge fund ever, thecombination of derivatives, mergers and
Amaranth fund, which cost investors over $6acquisitions, selling short and some murkier
billion.deals in the "deregulated universe". The
danger is, as predicted by some soothsayers
The other big thing hitting the markets isin 2005, that some funds will over-leverage
look-alike hedge funds, sometimes called ARFsand take excessive risks and go bust. That is
(Absolute Returns Funds). These are similarexactly what happened to Amaranth hedge fund
to what ETFs, Exchange Traded Funds have beenthat had a $6 billion plus blowout on the oil
to mutual funds. ETFs are a basket offutures market.
securities that are often designed to mimic



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