Should you be in a hedge fund? Do you have enough money to be in a hedge fund? No, the latter is not a question of snobbery. Hedge funds are not traditionally regulated by the government. They are not reviewed with the same level of scrutiny that mutual funds are. (Although I could argue that it doesn't really matter much, that's not the point of this article.)
The government worries about the average guy. It doesn't worry about the rich guy, figures the rich guy can take care of himself. So if you pool a bunch of rich people together in a partnership, it doesn't really care,
provided they are rich
. For me at my old firm that meant I went by the "$5 million in assets" rule, which my lawyers advised me would keep me out of trouble. As long as you could demonstrate you had $5 million in assets, you could come into my fund.
I think the law is wrong. I think people should be able to invest in whatever they want. But I don't write the laws. (The law in this case is the Investment Advisers Act of 1940).
Hedge funds can borrow a ton of money, they can bet long and bet short; they can pretty much do whatever they want. They are not hamstrung by charters that say they must be fully invested or must be growth stock-oriented only. These kinds of restrictions are an open invitation to underperform in this environment, and rich people don't care much for underperformers.
The main reason to be with a hedge fund is that the compensation for a hedge fund manager is performance based. I didn't make any money at my firm if you didn't make any money. (Mutual funds are asset-based.) I was right alongside you, the client. If I did well, you did well. If I did poorly, I worked for free. What a powerful motivation for making you money!
But picking a hedge fund manager is no different from picking a mutual fund manager. You are simply making a bet on someone's performance. Hedge fund managers who underperform mutual fund managers don't stay in the game very long. Look for a mutual fund that has been in the game for a while and has a longer-term record. Compare it with other funds and then make your choice.
Not much more to it.
Hedge funds aren't allowed to have unlimited numbers of clients, so they typically have high minimums. I used to keep the minimum at $2 million at my old place because it is just as difficult to work for the client with $2 million as the client with $200,000, but aggregating hundreds of little pools of money is much less cost-effective for existing partners then having just a few wealthy ones.
All these rules come off to make hedge funds seem like secret places where who-knows-what goes on.
That's a shame. They are just mutual funds for rich people, no better or worse than any other form of management.
So why do I like them? Because the compensation structure, with its rich highs and awful lows, tends to bring out the raw competition in people. The people who think they are the best managers, who really have confidence, become hedge fund managers. I like to be with those people. They make you more money than the other guys.
In the end that's all that matters.
Want to see what this old hedge fund manager is buying and selling for his personal account?
Click here, but you have to pay for it. I am not giving my personal account picks away for free. I work too hard. To heck with the Net's "free bias." This ain't
James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to