In the latest issue of Financial Advisor Magazine, Eric Uhlfelder writes this concerning hedges funds in his article “No Short Cuts“:

Relative to the market, most hedge funds have not been good investments. According to BarclayHedge, a major industry tracker, the average hedge fund has underperformed the S&P 500 six out of the last 10 years, including the past four calendar years.

Through the first half of this year, every hedge fund strategy substantially trailed the market, which was up nearly 14% through June. Even long equity bias funds underperformed the index by about 5%.

Throw in persistent reports of malfeasance…

The article is mostly about the problems of a fiduciary doing their due diligence regarding hedge fund selection. Hedge funds violate all 10 of our 8 safeguarding your money principles. (Yes, they even violate two extra ones.) Our due diligence is summarized in one word: Don’t.

Uhlfelder writes toward the end of the article about why hedge funds fail so frequently:

In a recent study of 22 hedge fund failures, prepared by the nonprofit research and educational organization Greenwich Roundtable, the three most frequent causes (evident in half the cases) were excess leverage, liquidity problems and inadequate risk management. About a third of the time, key problems also involved inadequate transparency, unreasonable volatility and service providers.

Uhlfelder recommends reviewing 20 key issues in order to do your hedge fund due diligence and the sources that provide the answer where you are looking for any one of ten red flags but even that won’t actually help. Instead he recommends visiting the hedge fund management where you can discover gaps between what you read in fund documents and what you see in “staffing, technology, investment process and management spending time running other businesses.”

Or, just don’t.

Photo by Michael Aston used here under Flickr Creative Commons.