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Building your own hedge fund

(MoneyWatch) As we have noted many times, hedge funds seem to be a poor option for investors. Still, the allure of being part of the hedge fund club seems to be too much for some investors to pass up. Now we're seeing mutual funds replicating hedge fund strategies, enticing all investors to be part of the club, but the early indicators show that their performance is just as poor.

A few months ago, the Wall Street Journal cited four publicly available mutual funds designed to replicate hedge fund strategies, but with much lower costs. The four funds cited were:

  • Natixis ASG Global Alternatives Fund (GAFAX)
  • IQ Alpha Hedge Strategy Fund (IQHOX)
  • AQR Multi-Strategy Alternatives Fund (ASAIX)
  • Ramius Dynamic Replication Fund (RDRIX )

We don't yet have much data, as the funds are fairly new. Still, it's worth taking a look to see how they have performed since inception. In other words, we'll hold them accountable. The table below shows the expense ratios and returns for each of the funds, providing us with 11 individual "fund years." For comparison purposes, I've also included the same information for three Vanguard funds:

  • 500 Index (VFINX)
  • Intermediate-Term Bond Index (VBIIX)
  • The Vanguard Balanced Index Fund (VBINX)

You'll note that in not a single case did any of the four funds manage to outperform either VFINX or the balanced portfolio. And in only two of the 11 fund years did any of them manage to outperform VBIIX. The bottom line is that the evidence adds to the body of research that demonstrates that if Wall Street is good at anything, it's transferring assets from investor's accounts to theirs. 

Image courtesy of Flickr user 401(K) 2013