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Wealthy pour into hedge funds

By Judy Martel · Bankrate.com
Sunday, September 11, 2011
Posted: 9 am ET

It's not easy these days to hold the line on equity investing with all the volatility we've seen in the stock market this year. The wealthy are responding by allocating more of their portfolio to hedge funds, according to a survey by advisory firm Rothstein Kass, which reported that nearly 90 percent of the 151 advisers surveyed say they are putting more money into hedge funds.

At issue is performance. Safer investments like cash and bonds are yielding relatively little, and the stock market is a roller coaster. According to Investment News, hedge funds returned less than 4 percent this year, but that's better than the stock market. The Dow Jones Industrial Average is down 5 percent this year; the S&P 500 is down more than 8 percent.

Hedge funds invest in a variety of strategies designed to counter equity volatility and enhance overall risk-adjusted portfolio performance. Fees are typically high, with a 2-percent management fee and 20-percent performance fee. Often there's a lockup period of six months to a year, leaving investors with less liquidity than they have in stocks. But for those who can afford less liquidity, returns have been worth it.

But investors shouldn't always expect positive returns. Hedge fund performance suffered in 2008, falling 19 percent, according to Bloomberg. That same year, the S&P dropped further -- 38 percent -- but that's little comfort when you're trying to get ahead. Hedge fund returns were 9 percent in 2009 and 8 percent in 2010.

If hedge funds aren't the answer for you, the best protection against volatility is to make sure your asset allocation matches your investment goals.

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