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.

You probably know where the term “con” comes from – as in, to “con” someone, or a “con game”.  It is short for “confidence”.  By gaining your confidence, someone rips you off.

That’s what we’re seeing right now. People are afraid. They do not feel confident – confident that they will keep their jobs, confident that they will keep their homes, confident that their retirement investments will be there when they are old.

Television, web sites, financial advisers, the analysts on Wall Street, the Wall Street bankers – all are playing a huge confidence game, and we, the investing public, are their victims.  These vultures have really benefited, ever since the 401(K) really took off, and it was clear that regular Americans, now deprived of pensions and other ways to retire comfortably, would just shovel money in without really  knowing anything at all about wise investing, on the promise that “over time, the market returns 8%-10%-14%” you name a figure.  The whole thing has been a con.

But really, what I wanted to talk about is confidence, and how to regain it.  Think:  What would it be like to feel confident that your money was safe, right now?  Think of the stress that would be off your shoulders.  Think of how you would breathe easier, knowing that whatever the market was doing, up or down, you are in a secure position, not losing, not having to learn more than you have time to learn, or more than you can understand.  Not know what the heck to do as you watch the market numbers go down.

What would it take to feel confident that your money was safe?  A friend of mine was completely freaked out, and kept asking me, What should I do with my retirement accounts? (This was last November, she was down 15%.)  I told her I thought the markets would keep going down, for some time, but that was just my opinion, and she needed to do what she felt was safe.

Her adviser (who was completely ripping her off in fees by the way, but she didn’t know that) kept saying “Oh no, you are in for the long term, don’t worry about blips in the market.”

Yet when I looked at my friend, all I saw was worry!  She kept saying she hated the markets, hated having to think about being in stocks.  She did not like the stock market, did not like that she couldn’t understand it.  Her confidence was shattered, and so was her emotional well-being.

I asked her:  Given how you feel right now, are you willing to bet what money you have left that not only will the markets stop going down, but that they will go up enough in one year to recoup what you’ve already lost?  Her answer was no.

I said to her:  If you are this uncomfortable in the stock market, take your money out!  Get this monkey off your back!  You can earn small but secure returns in money markets, CDs, and even learn later about government bonds or other less risky investments.  Will you earn 8%, 10%, 12%?  No, but that is never a sure thing anyway.

She moved all of her accounts to money market funds.  Her relief was palpable. She could breathe again!  She did not have to spend day in and day out worrying and watching tee vee, watching her hard word slip away from her.  Today, she feels a whole lot better for sure that she’s missed the downturn in the last 4-5 months as well.

If you feel insecure being invested in stocks, if you do not have confidence that  your money is in a secure place – then move it. Now. Today.  If your advisor tried to talk you out of that, remember that they have a vested interest in getting fees from you.  Move your money out of their claws.  Your gut is at least as accurate as any investor – including me!  No one has any answers in a market – possibly a depression – like this.

In case you care, and I’m not saying you should do any of this, here’s what I would do, and actually is what I am doing right now:

Move your money to a high-interest savings account.  ING Direct is a good one, and if you also open chekcing, you can access your money wit a debit card.  High Interest these days is just under 2%, but would you rather make 2% or lose 25%?

One your money is safe, then learn about what is out there that is cash or cash-like, and then move some money into those accounts. For example, there are government bond mutual funds like GNMA, or inflation-adjusted bond funds or ETFs where you can invest, and earn a few more points, and your money is relatively safe.  Note:  Funds and ETFs are not insured accounts. For FDIC insurance, you shoudl be in a money market, or CD, and verify it is insured with the institution.

You can then take some money out of savings, and open accounts with a low-cost broker like TradeKing.  Buy into some of those cash-type vehicles through these low fee brokers.

Once you are securely set there, you can explore other ideas, like buying some gold or silver, or some commodities, or buying stocks in foreign countries like China, which are available as ETFs or within a fund.  (I prefer ETFs but more on that another time.)

I also only put the company match into my 401(K).  I put extra money into a ROTH and Individual IRA outside my company, into a self-directed brokerage account, where I can decide for myself where to invest my money – I’m not stuck with the investments and rules my employer decides is right for me. They’ve already proven they have no idea how to protect my retirement interests.

The bottom line is, you need to restore your own confidence.  The so-called advisors are not going to help you.  Television is not going to help you.  If you are scared, fearful, anxious, take steps NOW to remove that stress from your life.

Your money can in fact be safe, and there are in fact places to invest where you can make money right now.  Just not in the ways that the con men will tell you about.

I can’t believe I’m still hearing it:  Someone on CNBC just this morning said, Oh, don’t take your money out now, you’ve lost too much!!  Yeah, great, wait for Dow 5000.  There are still plenty of financial experts saying that’s possible before it’s all over.

Guess what? The tee vee “experts” were saying that in November ’08 too, so if you listened - to CNN or CNBC or FOX or XYZ  - tell me, where are you now?

I’ll say it again: in a volatile market, why not get out of mutual funds, at least with part of your money, and put it somewhere you can make a little, and wait for things to turn? I would rather make 2% in a savings account for a year than lose another 10% in a stock fund.

Some ideas:

- For investment accounts: Get out of the dang index funds – they include too many companies that are at risk.  If you aren’t willing to learn to invest stock so that you can confidently buy individual stocks or ETFs, then put your money in a CD.   If your financial adviser is still losing you money, don’t be afraid to move your account.  Anyone advising you to stay put is going to lose you more money.  IMHO.

- For a retirement account: If you get a company  match, meet it with your 401(K) contributions, but NO MORE.  Then take that money and invest in insured money market funds or “inflation fighter” funds – avoid the index funds!  They are for later, probably not this year, but maybe next, not until you are confident the market is again moving in the right direction.

- If you have a 401(K) right now, you are likely down 30-40%.  But don’t take it all out of your retirement account – you’ll get slammed yet again with fees and penalties.  Reallocate within your 401k to whatever funds are closest to cash, Treasuries or A rated bonds – ask your plan administrator.  (NOTE:  This is not 100% safe either however in a credit freeze.)

- If you lose or leave your job, immediatly switch your retirement account to a 401k rollover – as well as funds you haven’t rolled over from previous jobs – roll them into self directed IRA accounts, using a discount brokerage.  DO NOT ROLL OVER TO YOUR NEW COMPANY – or your investment options will be severely limited to mostly stock index funds!  In a self-directed fund, you can invest in ETFs for commodities, metals, shorts, and a wide variety of other funds. We like Scottrade as well as TradeKing for to discount brokers.  (Not affiliate links! We just like them!)

- For non investment money, get your hands on as much cash as you can, and put it into an insured money  market fund. Hold off doing anything until you (1) spend time to learn to invest stock so that “what to do” is not a crap shoot, (2) understand why your 401K was so risky to begin with, and (3) find good ideas about where to look for solid returns, including experts who have a track record you can believe.

Now you’ll have to start to learn to invest money.  There are places to make money, maybe not in a 401k but if you also open a Roth IRA or other account, you can make up for that outside your job. And if you get laid off, you can roll the money into your self-directed account.

There are places to be making money now, but you have to feel comfortable you know what you’re doing, and be comfortable with a degree of risk that we haven’t been trained to accept. But the rewards in this market, and for the next few years, will only come with more risks.  If you aren’t comfortable with that, then you need to stay safe in cash or similar vehicles.

Image by scottwills via Flickr

I wanted to go back on something I posted a few posts ago.  You probably SHOULD keep investing in a 401(K) or other retirement plan, at least up to the company match, if you are lucky enough to get one.  The danger is in continuing to put your hard earned dollars into this market through some kind of standard index mutual fund.

My co-worker argues with me: Oh, it’s dollar cost averaging!  We’re buying on sale! It’s OK to lose, because I have a 20 year time horizon!!  What a bunch of Bull!   Why should you lose two years or more worth of increases of any kind, and actually take a loss?Then, take the next two years after that, or longer God forbid, to get back to where your balances equal just your inital investment?

Dollar cost averaging is for dupes! It’s to make you believe it’s EASY to manage your own retirement, so that your employer doesn’t have to feel guilty about not offering any kind of fixed retirement plan any more.  Meanwhile, you will LOSE 4 years of any return at all, plus principal, if you are just following the “conventional wisdom”.

Investments experts are not “dollar cost averaging”.  They are sitting on the sidelines with their cash. The are investing in short ETFs, currencies, and corporate bonds, all of which you likely have NO access to in your 401K.  Only the dupes keep “buying” stocks at these crappy levels, because they haven’t taken the time to learn something and stop their contribution from going into the same old index fund.  OF COURSE Wall Street is telling you to keep contributing, so they have someone to SELL TO.

So, put your $$ into your retirement fund, up to the company match, to keep saving, but keep it in the government bond fund or the savings account fund. What the heck, why not EARN 3% instead of LOSING 20%.  Then in 2 years when the market slowly creeps back, THEN switch your allocations.  For everything you want to save beyond your company match, set up a self-directed ROTH.  Put as much as you can in there.  And LEARN how to invest, find other vehicles that are actually making money (they are out there).  Otherwise, you’re just throwing it away.

I like Dave Ramsey.  It was because of his book, Total Money Makeover, that I started using the envelope system, and actually now save some money each month.  I think he’s being proven correct right now about being debt-free – and I’m working to get there myself.

But he’s still telling people to put their money in “quality index funds” so you can earn “14% over time” – WHAT??  There is NO truth to the 14% number (actually that’s the highest I’ve ever seen – 10%, 12% is the usual number).  In this market, telling people to do this is a complete misrepresentation of what their specific, actual results may or may not be.

The simple fact is that any money put into index mutual funds 10 years ago are back where they were then.  There has been NO increase in the last ten eyars – let alone 14%!!  How many people will blindly do this based on his suggestion alone?

He is good with the “get out of debt” idea. But he should just plain stop telling people where to put their investment money.  The whole “stick it in an index fund and sit back and enjoy the winnings” method is out the window.  It never really was true, and today even less so, that this is the best way to invest.

Bottom line:  If you don’t know anything about investing, stay out of the market.  Don’t get your advice from people on tee vee.  If you want to hire somone, you better know what the heck they are talking about, or you’ll get screwed, either intentionally or accidentally.  If you don’t know and don’t want to know, then buy CDs.  Anyone who invested in a 6% CD ten years ago would right now be far far ahead of anyone who had their $$ in the market.

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