If you want some free trading education on investing in stocks, a good lesson involves how the returns of these securities stack up compared to those generated by hedge funds.
Historically, equities have generated higher average annual returns than other asset classes, as they have appreciated roughly 10 percent per year over time. While shares of stock represent units of ownership rights in companies, hedge funds are investment vehicles that are incorporated as limited partnerships.
These funds harness a variety of strategies in an effort to generate returns in all markets, and they use a wide range of financial instruments, including derivatives contracts, in order to meet these objectives.
Hedge fund returns
According to a recent report released by major financial services firm Goldman Sachs, hedge funds appreciated 5.4 percent through May 10, while the benchmark S&P 500 Index surged 15.4 percent during this time, according to Bloomberg.
The document, which was written by lead authors David Kostin and Amanda Sneider, along with a team of Goldman Sachs analysts, indicated that mutual funds generated an average return of 14.8 percent during the period, the media outlet reports.
These funds have performed poorly in past years, and analysts wrote in the document that the "multi-year trend of lackluster hedge-fund returns continues in 2013," FINalternatives reports. "Strong long performance was not enough to outweigh the drag from popular short positions."
Since hedge fund returns have persistently lagged behind those of the stock market for the last few years, the situation has resulted in the S&P 500 Index surging 77 percent since the beginning of 2009, whereas this type of fund has appreciated an average of 21 percent during the period, according to data compiled by Bloomberg.
Reasons for lackluster returns
In a recent Bloomberg View opinion piece, James Greiff writes that the poor returns generated by these investment vehicles relative to the S&P 500 could have been created by any one of many factors.
For example, the author notes that many of these investment vehicles made wagers against stocks that did not pan out. For example, many of them bet that shares of healthcare giant Johnson and Johnson would fall, but instead, these equities increased in value.
The Goldman Sachs analysts wrote that not only have these funds been taking short positions on the stocks of the healthcare giant, but also Gilead and International Business Machines, according to Bloomberg.
Another factor noted by Greiff is the volatility of the equity markets, which has been low lately. The Chicago Board Options Exchange Volatility Index, a commonly-used measure of the fluctuations that happen in the stock market, recently fell to a reading of roughly 13, compared to more than 40 in the Summer of 2011 and close to 90 during the financial crisis.
Hedge funds frequently profit from any disparities that exist between similar assets, which are more likely to exist during times of high volatility, the author writes.
These investment vehicles charge their clients 2 percent of assets and 20 percent of returns, which can make them highly profitable when they experience strong performance.
Comparatively, it is possible for you to invest in stocks by purchasing individual shares or through different financial instruments such as exchange-traded funds. Many of these securities lack management fees, and therefore have very low expenses. Index funds are another example of assets that lack such expenses for a management team.
Any reduction in such fees will add to the returns that you enjoy by investing in these securities.
There are many different investing options available, so if you want more free trading education, you can find it at TradingPub, home to some of the top investors and traders in the industry.