With the market crash from 2008-2009, one could ask, are hedge funds finished? The quick answer to the question is “hardly”. There is no general definition of what is a hedge fund. In the beginning, hedge funds would help “hedge” investments by selling short the stock market, and so providing protection against volatility in the stock market. But now, the term is used more broadly to describe any kind of private investment partnership.

Globally, there are thousands of different hedge funds operating. Their main goal is of course to make lots of money, and to do so by investing in a variety of different investments and investments strategies. Often the strategies used are more aggressive than than the investment strategies of standard mutual funds.

Generally, a hedge fund operates as a private investment fund. The fund’s general partner selects different investments and also manages the trading activity and everyday operations of the fund. The investors or limited partners will invest much of the money and share in the gains of the fund. The general manager often charges a small management fee and earns a large incentive-based bonus if the investments earn a high rate of return.

While this might sound like a mutual fund, there are some important differences between mutual funds and hedge funds:

1. Mutual funds are managed by mutual fund or investment companies and are quite heavily regulated by federal law. Hedge funds, since they are private funds, have (so far) fewer restrictions and regulations.

2. Mutual fund companies invest only their client’s money, but hedge funds can invest their client’s money as well as their own money in the underlying investments.

3. Hedge funds charge their clients a performance bonus, usually equal to 20% percent of the gains above a certain floor amount. This is in line with equity market returns. Some hedge funds have successfully generated annual rates returns of 50% or more, even during volatile or difficult market environments. A mutual fund return is usually not as high.

4. Mutual funds have disclosure requirements, as well as other prohibitions against investing in derivative products, such as using leverage, short selling, taking too large a position in one investment, or investing in commodities. Hedge funds however may invest client funds however they wish.

5. Hedge funds are restricted from soliciting investments, and this is why you hear very little about these funds. During the five years prior to September 2008, some of these funds have doubled, tripled, or even quadrupled in value or higher. However, it’s important to remmeber that hedge funds do incur large risks and in this difficult economy, many funds will likely disappear after losing big.

Hedge funds are just another way to protect wealth, but in a tough economic environment, it’s likely that some restrictions will be imposed in the future.

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The first time I read about the problems inherent in 401(K)s, it was reading Rich Dad’s Guide To Investing by Robert Kiyosaki.  Whatever else you think of him, his discussions of how the tax laws were written and rewritten to benefit the rich and not the middle or lower classes are invaluable, as well as his concern over why 401(k)s don’t work for the vast majority of people.  (Pick it up for a couple bucks used, and while you’re at it read Rich Dad’s Prophecy too for a real hair raiser…)

Here is an article today in the Washington Post saying the same thing, (although where were these articles  five, six ten years ago…)

Jim Cramer too has ALWAYS said to only put into your retirement account what your employer matches.  Beyond that, use a ROTH or some other self-managed vehicle where you can invest in individual stocks, bonds, CDs or investmetns that YOU control, not the ubiquitous index fund or “diversified” global funds.

You may argue with some of the recommendations of these writters, but the underlying logic makes sense, and is borne out by the results in the real world for the vast  majority of people.  It’s worth taking a step back and looking at the big picture.

I have some links and ideas I’m in the process of compiling, from financial types who recommend where to invest now, if at all.  Also some additional ideas for finding cash.  Here’s one for today:

- Get rid of gas cards, which have extremely high interest rates.  Pay cash, and start carpooling once a week or more. Just be sure to bank the savings.  Sounds trivial like most of htese savings tips, but they add up, and in changing your lifestyle you’ll become more financially sound.

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