CNN Money- Chastened by the 2000-02 crash, the mutual fund industry has morphed into a 401(k) bureaucracy, cranking out bland diversified funds and packaging them into “life cycle” portfolios that you don’t have to think much about.
All the glitz these days is in the secret-handshake world of hedge funds. Meanwhile, for those who just want a cheap and easy way to get into the market, exchange-traded funds (ETFs) are giving mutual funds a serious run for their money.
So are mutual funds only for chumps now? Plenty of smart folks seem to think so. David Swensen, Yale University’s chief investment officer, has famously labeled the fund industry as a whole a “colossal failure.”
But even if that’s true, it doesn’t mean you can’t do well investing in mutual funds – as long as you pick ones that don’t waste your money. And once you’ve taken a closer look at hedge funds and ETFs, you’ll see that they are a long way from replacing mutual funds as the best way for most of us to invest.
Hedge funds are simply private investment pools for institutions or wealthy individuals, with few of the regulations that apply to mutual funds. They wowed a lot of people in the wake of the crash: As blue-chip stocks lost a third of their value from 2000 through 2002, the average hedge fund made a decent profit.
How? Hedge funds vary wildly, but the main thing to know is that they can invest in nearly anything: stocks, bonds, private companies, real estate, commodities. So a rough patch in a key market doesn’t close off all opportunity for profit. Plus, hedge funds can sell short, which means betting an asset will fall in price. That certainly came in handy during the crash.
On the other hand, hedge funds often cool when the stock market booms – as they have recently. That’s why some of the smartest hedge fund clients don’t buy to get huge gains. They buy to lower risk. Because hedge funds’ returns need not be closely linked to those of, say, the S&P 500, they can help you diversify.
