Do I have a deal for you!
You are going to party with the big boys: Pension plans. Normally, this investment is only available to them, but we are going to make an exception for you.
I know that some of you believe you are terrific stock and manager pickers. Maybe you are. But your expertise cannot compare to Russell Investments. Just look at the numbers:
Russell advises institutional and individual investors on the investment of $2 trillion of assets.
It has $259 billion under management.
It has been in business for 70 years and operates in 44 countries.
It is a world class company. It counts The Bill and Melinda Gates Foundation, IBM and Coca-Cola among its more than 3000 clients.
It manages over 340 funds worldwide. Although I have not researched these funds, I am sure that many of them have impressive performance records.
The chief investment officer of Russell says: "No one knows managers like Russell...Russell has the ability to identify the managers who are among the very best at selecting stocks."
It is no late comer to the alternative investments business. It has over 30 years of experience in that specialized area.
So here's the deal. I know you are going to like it.
The fund you can invest in is a very conservative fund. It belongs to a class of hedge funds known as "non-directional" funds.
The fund is not shooting for high returns. Just a steady 0.5% above bond market returns. But it has little correlation with the bond market and it has only a third the volatility of equities. Safety, preservation of capital and consistency of returns are the goals of this fund.
These funds don't make a bet on market direction. That can be very risky if the market goes against you.
It goes long on undervalued stocks and short in overvalued stocks.
If both the long and the short play work out, the fund reaps a big reward.
If the market goes up, the shorted stock will increase in value, which will be a loss. But the loss should be more than offset by the gain in the undervalued stock.
What if the market goes down? No problem.
The profit on the stock that was shorted will more than cover the loss on the long position.
So, whether the market goes up, down or sideways, you are protected.
The trick is to pick the right manager, since "stock picking" is obviously the critical skill. Here is where Russell's expertise in "manager picking" comes in.
You will not be putting all of your eggs in the basket of any one fund manager.
Instead, using its extraordinary database and research expertise, Russell will put together a group of 40 of the best non-directional fund managers on the planet. To further diversify your risk, these managers will employ at least five different non-directional strategies: long/short (as we have discussed), market even play, currency arbitrage, capital arbitrage and market neutral equity schemes.
The fees are the typical hedge fund fee structure: 2% base and 20% of the profits above a stated amount.
Why would pension plans, your fellow investors, pay these stiff fees when they could simply index their portfolios and capture market returns at a fraction of this cost?
The fund manager explained that "[T]he high fees of a hedge fund become acceptable if it can buy them [pension plans] an element of smooth returns in their portfolios."
The data indicates that 10% of many pension fund portfolios are in these non-directional funds, so you would be in good company. Why not follow their lead and invest 10% of your portfolio the same way?
On April 3, 2008, Russell announced that it was closing two of its "Alternative Strategies" funds, including the fund I described. Two of its three main hedge "fund of funds" (including one that was not closing) had less than $2 billion in assets, which was a third of the level six months ago.
While the dismal returns of these funds is not typical of the performance of Russell's funds, the results are not surprising. A recent study showed that the majority of retirement plans underperformed a simple S&P 500 index.
Are you a better "manager picker" than Russell? Is your broker?
Are you a better "stock picker" than the 40 highly paid and well trained professional fund managers selected by Russell to implement a conservative, "non-directional" strategy? Is your broker?
There is a moral to this story. If you are a regular reader of this column you know what it is. If you are a new reader, you can easily figure it out.
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