Price Swings: Hedge Funds and the Markets

Price swings are not just occurring in oil and other commodities but in equities and fixed income securities as well. It is clearly critical to have investment products in your portfolio that zig when the markets zag in order to protect your assets during these uncertain times.


8 March 2011

This is the next in a series of guest blog posts by Intralinks’ collaborators, partners, and vendors. Daniel Strachman is a financial expert with more than fifteen years of Wall Street experience. He is nationally recognized as a strategist, futurist and commentator on Wall Street, the economy, and investment strategy. Daniel is also the moderator of the HEDGEAnswers Conference Call Series, a unique educational program on hedge fund structures and investment strategies. He is also the author of seven books on investment strategies. Learn more about him at www.danstrachman.com. He can be reached at das@hedgeanswers.com.

A revolution here, a revolution there and before you know it, you have real change! Well, the events in the Middle East seem to point to some real change coming to that part of the world. With change comes volatility and investors around the globe are experiencing significant market dips and dives as the events continue to unfold. Price swings are not just occurring in oil and other commodities but in equities and fixed income securities as well. It is clearly critical to have investment products in your portfolio that zig when the markets zag in order to protect your assets during these uncertain times.

One way investing is not good for anybody, which is why we all need funds that hedge. Hedge funds, in their simplest definitions and practice, are supposed to make money regardless of what is going on in the market. In other words, hedge funds are supposed to zig when the markets zag.

The idea, in theory, is simple — create a portfolio of longs, marry them to a portfolio of shorts and you make money when markets rise and you make money when markets fall. I wish it were that simple in reality. Unfortunately, that’s not the case. There are many people who masquerade as hedge fund managers who are really long-only managers. These managers do not hedge, do not protect against the downside, and still collect significant fees. The reason these people are able to operate is because of the lack of due diligence that investors sometimes show before, after and during their investment. Due diligence — ongoing due diligence — is the key to the success of any investment, regardless of its size. People need to get involved with their money and do the research to make sure that they are getting what they pay for.

A recent New York Times story suggested that hedge fund managers were getting what they deserved as more and more investors are redeeming and demanding a discount on fees.  However, this is just not the case. In reality, the only people who complain about fees are those who cannot charge them. The fees that hedge fund managers charge are based on what the market will bear. When the market demands a price correction, well, guess what, the fees will adjust accordingly.