Allan Sloan of Newsweek recently wrote this article on hedge funds. An excerpt:
Susan Wyderko, head of the Securities and Exchange Commission’s office of investor education, warns investors to beware. “Although funds of hedge funds offer more diversification than investing in a single hedge fund,” she says, “they still can be riskier and more expensive to own than traditional mutual funds.” I’m all in favor of intelligent, informed investors’ being allowed to take intelligent risks with their money. But I fear that hedge funds have had such a glorious history (and sound so sexy) that naifs will buy into them and get burned. And wait, there’s more. Because far too many pension funds invest based on past performance, pension money has been flooding into hedge funds the past few years, even as hedgies’ performance has deteriorated. Lots of pension funds are treating hedge funds as something in which to invest a certain percent of their assets, rather than as complicated, tricky investments that should be analyzed individually. This can’t possibly end well.
Enough. No more treating everyone like they are helpless. To make money in the markets, you must risk. No risk, no return. The more you risk, the greater your chance for return. We know we have a problem when the government determines who can try and get rich and who can’t.
Gibbons Burke of MarketHistory.com addresses the issue head on:
The market serves a valuable function in our economy not often talked about: It provides an efficient mechanism for transferring precious capital from those who are ill-equipped to steward its growth to those who are adept. A variety of market participants provide this service up and down the food chain. The financial markets are voluntary arrangements. No one is compelled to purchase a piece of trading software. No guns are involved in herding investors into seminars. Advisory letters are sent to those who willingly subscribe to them, and may be cancelled at will. Investors who avail themselves of these services without exercising due diligence and taking responsibility for their own actions are the true dangerous lot — they are a danger to themselves. They blame others for their bad decisions and misfortunes; they delude themselves about the true nature of their problem, so the solution remains ever beyond their ken.
We will take Burke’s view over Sloan’s every time. Where do you stand?
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