January 23, 2012 Update

roberts@clearfa-llc.com (Robert Schmansky) — Tue, 24 Jan 2012 07:53:00 PST

Media Roundup
Find us quoted in Money Magazine's January / February 2012 issue regarding the risk in variable annuities.

SmartMoney - Blame Europe for Higher Grocery Bills... I don't know if it's all Europe, but this piece discusses the relatively low change in CPI for December hides the fact prices have generally been rising. My opinion is QE and lingering uncertainty in energy and foreign affairs over 2011 has played a part as well.

Blog Roundup
FPA: Planning Your Digital Estate. Your estate plan should include plans for your digital pictures, and accounts such as facebook, twitter, and Linkedin.

Visit our website and past media library at www.myclearadvice.com

Another Funny Financial Blog

roberts@clearfa-llc.com (Robert Schmansky) — Thu, 19 Jan 2012 12:27:35 PST

I realize this may only be funny to a certain type of financial advisor, but it also points out how important financial dialogue can be.

I lost count but for educational purposes, or a possible financial planning motivated drinking game, try to keep track of how often when financial conversations are boiled down do you hear:

The word "bet."
Someone else is profiting (including going on cruises).
Someone doesn't know what 'this means.'

Hedge of Darkness

roberts@clearfa-llc.com (Robert Schmansky) — Thu, 19 Jan 2012 09:35:02 PST

The following is a piece written by Jim Parker of Dimensional Fund Advisors that explains why hedge funds are not recommended investments for individuals. Additional recent research suggests that net of fees, individuals may achieve their results of low-volatility with similar returns from treasury inflation protected securities rather than investing in hedge-funds.

It's true. Big money can be made from hedge funds. If you run one, that is.

That's the conclusion of a new book that says people who invest in hedge funds would have been better off over the past nine years if they had stuck to a broadly diversified portfolio of vanilla stocks and bonds.

The book is The Hedge Fund Mirage: The Illusion of Big Money and Why It's Too Good to be True, by Simon Lack, an asset manager who formerly chose hedge funds for major US bank JPMorgan.

Lack argues that the 18% return on hedge funds in the nine years to November 2011 was easily beaten by the total 29% gain from the S&P 500 index. The gap was even starker for investment grade corporate bonds, which in the same period gained 77%, as measured by the Dow Jones Corporate bond index.

Of course, the underperformance of hedge funds over this period is even greater once the customary 2% management fee and 20% performance fees charged by hedge fund managers are taken into account.

If individual hedge fund managers are generating the desired "alpha," or additional returns above the market, then the benefits of that skill tend to go to the managers themselves rather than to investors.

In fact, Lack estimates that from 1998 to 2010, the hedge fund industry captured at least 86% of the returns it earned for its customers. This might explain why yachts cruising the Caribbean tend to be skippered by hedge fund managers, not investors.

For anyone who has followed the hype surrounding hedge funds for many years, this is not really a surprise. A good proportion of the investing public—egged on by the financial media—genuinely wants to believe that consistent market-beating returns are achievable without taking on additional risk and paying excessive fees.

From a marketing perspective, at least, the appeal is fairly evident. After all, the more exclusive you make a club, the more likely people will pay a premium for joining it.

While the hedge fund industry no doubt would contest the findings of Lack's book, one doesn't have to agree with his numbers to still harbor reasonable doubts about risking one's hard-earned savings by investing in hedge funds.

Industry groups that report hedge fund returns rely on voluntary disclosures by the funds themselves on the returns they generate. Shah notes this creates potential for biases in the data, such as the omission of poor returns or the dropping out of the returns of failed or discontinued funds.

This is in addition to other drawbacks of hedge funds, such as illiquidity, relative lack of oversight, the additional costs of leverage and derivatives and, of course, the substantial fees charged by the managers themselves.

Shah's paper concludes that the highly uncertain payoff from hedge funds, the high expense ratios, and the lack of disclosure around them mean investors should exercise caution before investing in them.
Starting one up is another matter altogether.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This article is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.

Clear Money Blog™

January 23, 2012 Update

Another Funny Financial Blog

Hedge of Darkness