Whenever I scan the financial news for items of interest, I understandably focus more on currency and foreign exchange (Forex) updates. So, when I saw a piece yesterday on the Dow Jones Newswire proclaiming how volatility has been affecting returns in currency hedge funds, it caught my attention.
The reporter said that Forex hedge funds posted their biggest loss since August of 2005. She further said that 83 percent of currency funds reported negative returns in May. In fact, the losses detailed in this story covered 60 currency funds with the biggest loss last month, a significant 12.64 percent.
This was a staggering number to me as someone who invests in the Forex market and is an investor looking for alternative ways to make money. Hedge funds have always been touted as the hot way to make more significant returns than, say, mutual funds or an index fund. But this data made me question the hedge fund model. If you are assessing currency hedge funds as a potential alternative investment option, there are a few things you should consider before you dive in. First, the price of participation is not insignificant. Most hedge funds have steep account minimums, typically over $100K just to get in. You should also be aware that these funds are often not exclusively invested in currency – some are also invested in stocks, which negates their true “alternative” nature. There are other limitations too. Factor in withdrawal restrictions and the fact you cannot direct/control your actual allocation and you are pretty much at the mercy of the portfolio manager or trader calling the shots.
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