Tuesday, December 22, 2009

The Primary Place for Most Alternative Investments-The Dumpster

Let’s start first by keeping the topic simple. The two largest Ponzi schemes in 2009 were Bernie Madoff and Tom Petters. Investors were lured into these “hedge fund” and “private equity” products by the too-good-to-be-true performance claims.

At my company, Wade Financial Group, Inc., we get calls weekly from “sales reps” for a myriad of investment product and wanting us to consider their products. Close to 90% never get in our doors. These “pitches” end up in our shredder or the dumpster.

We spent an hour with two reps from a company recently and didn’t find any reason to spend more time evaluating their funds. Here is a quick summary of the waste of the time that meeting was. They were unprepared and didn’t have all the fact sheets or prospectuses with them. Shocking but true. They also couldn’t explain how/why their products could create value for WFG clients…they could only explain the complexity.

Our conclusion was that they built their products to market, not to perform. Their core product has a long lock-up period for your money (i.e. you can’t get at it when the ship starts to sink) and has had lackluster performance. And comes with a very high expense structure. Their mutual fund charges 4% and has a high exposure to market neutral and long-short strategies so we wouldn’t want to own it when the market is cheap and there are cheaper ways to get defensive when the market is expensive. It is the same old story every time we look at these types of products. They pitch a potential gross return of 10%, have fees of around 4-5% per year, are illiquid and do not have good track records. The ones that do have good track records seem to be the ones that end up as Ponzi schemes!


Stay away from Hedge Funds and other illiquid and hard to evaluate investments that pitch returns that sound to good to be true–they always are.

Only by standing against the prevailing winds–selectively, but resolutely–can an investor prosper over time. Such a strategy may underperform during markets that are rising based upon the momentum of the herd vs. fundamental valuations.

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