Hedge funds often capture headlines.
Ken Griffin’s Citadel Investment Group started with $4.2 million in 1990. At the end of 2023, the firm had $58 billion in assets under management. What’s maybe even more impressive is Citadel has returned $25 billion in capital to investors since 2018.
Then there’s Renaissance Funds … run by math whiz Jim Simons. This hedge fund returned an average of 39% a year after fees for decades. At that rate, your investment doubles every 22 months.
But here’s the catch. These returns aren’t available to individual investors. Griffin, Simons and many other successful hedge fund managers don’t provide access for new investors, or they set the minimum investment at millions of dollars.
For us, however, that might be a good thing. The typical hedge fund is like a club that Groucho Marx would be allowed to join. The great comedian supposedly said: “I don’t want to belong to any club that would have me as a member.”
Turns out, that’s great investment advice…
Beat the Average Hedge Fund
The news may steer our attention to select hedge funds with exceptional performance … but the average hedge fund returned only 7.6% last year. Meanwhile, the SPDR S&P 500 ETF (NYSE: SPY) gained almost 24%.
Now, one year isn’t enough time to judge an investment’s performance. But the longer term doesn’t improve for hedge funds in comparison to SPY.
Over three years, the average fund gained an average of 4.3%. That’s exactly half the 8.6% return of SPY in that time.
And over five years, hedge funds gained 7.0%. SPY did almost 100% better with a 13.9% return.
We can look at a number of reasons that hedge funds, as a group, underperform.
How Typical Hedge Funds Play It Safe … and Underperform
A primary reason is their high fees. A typical hedge fund charges about 1.5% in management fees. That’s 16.7 times more expensive than the SPDR S&P 500 ETF Trust (NYSE: SPY). Plus, fund managers take 20% of the profits if they beat their benchmark.
All those fees explain why there are more than 30,000 hedge funds in the world. That means there are almost as many hedge funds as there are Starbucks.
For many managers, the primary goal of the fund is to keep the fees coming in. That means they invest in stocks that are safe. We have an old saying from the time when Groucho was on television: “No one gets fired for buying IBM.”
If managers stick with industry leaders, they can defend their positions to investors even when they underperform.
This is one reason individual investors can beat hedge funds. We don’t have to buy the same stocks everyone else is buying. We can buy low-priced stocks.
Small Stocks: The Club You Want to Join
Small stocks — generally meaning those priced under $5 — are covered by restrictive SEC rules. Managers may want to avoid these stocks to avoid running afoul of authorities.
Even if they take time to understand the rules, managers may still avoid the stocks so that they don’t create additional compliance costs. After all, they are managing the fund to generate high fees, and there’s no point in incurring high costs in the business.
But their loss is your potential gain. Individuals don’t face these restrictions or costs.
That means you can find low-priced stocks capable of delivering triple-digit and even quadruple-digit gains in less than six months.
In fact, my colleague Adam O’Dell has already uncovered five top stocks that are virtually invisible to Wall Street. His research shows that they have the potential to rise as high as 500% this year.
You’ll learn how you now have the best chance of making exponential profits and surpassing the average hedge fund in Adam’s $5 Stock Summit. But hurry, we’re closing the doors on this offer at midnight Eastern time tonight.
Until next time,
Mike Carr
Chief Market Technician
