Hedge funds aren’t what they used to be. They used to be exclusive investment vehicles where wealthy investors could generate double digit alpha with very little correlation to the major market indices. Nowadays most hedge funds don’t deliver uncorrelated returns at all and they generate minuscule returns after fees and expenses.
I am not saying that all hedge funds are bad. Our flagship strategy focuses on the best stock picks of the top 100 hedge funds (out of nearly 1000 hedge funds tracked by Insider Monkey) and has been able to outperform the market by around 40 percentage points since its inception in May 2014. By tracking the best performing hedge funds we’re still able to identify extremely attractive priced stocks (see our latest idea, a growth stock trading at less than 3 times its core earnings), but our strategies are highly correlated with the market.
Long-term bonds are doing very well this year as long-term interest rates hovering around their all time lows. iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) returned 20% and iShares 7-10 Year Treasury Bond ETF (IEF) returned 11% this year. However, this means that going forward 10-year and 30-year treasury bonds will probably deliver negative real returns (i.e. the actual returns will be below the inflation rate). Rational investors are buying these bonds only because they expect/hope to sell it at a higher price to an irrational Fed at some point in the future. That’s not how we invest.
Gold investors also experienced very strong returns this year. SPDR Gold Shares (NYSE:GLD) returned close to 20%. This year gold prices were positively correlated with the market but over the long-term the correlation coefficient is not much different than zero. The problem with gold is that it isn’t a good long-term investment. Last year Warren Buffett compared