Apple Inc. (AAPL), Google Inc (GOOG): The Media is Dead Wrong About Hedge Funds

Hedge funds are taking advantage of investors not because they aren’t good at stock picking, but because investors don’t ask for their money back when hedge funds get too big. There are three simple solutions to this problem.

First, investors shouldn’t pay anything for hedge funds’ beta exposure. Second, investors shouldn’t invest in hedge funds that focus on large-cap stocks (or pay ONLY a management fee of at most 2%). The best way of doing that is investing in small and talented hedge funds like Sio Capital. Third, investors can do what we do: they can invest in hedge funds’ best stock picks without paying them a single dime. Our picks have outperformed the market by more than 30 percentage points. I haven’t heard of a lot of hedge funds that have done that over the last year.

Conclusion

Hedge funds aren’t that complicated. They are amazing at picking small-cap stocks and they are good at picking large cap stocks. It is also possible to spot great hedge fund managers by analyzing their historical performance. The problem is hedge funds are asset hoarders and they charge exorbitant fees. These fees are justifiable if they were only investing in small-cap stocks. Unfortunately they aren’t and this isn’t their fault. It is up to the investors to force hedge funds to invest in smaller-cap stocks, or to yank their money from hedge funds and do it by themselves. It is as simple as that.

Disclosure: none