The Buzz

There might be a way to profit from hedge funds even if you don’t have the money to actually be in one.

At least that’s the message you can read between the lines of an article in the Journal of Corporate Finance by University of Kentucky assistant finance professor Christopher Clifford.

Hedge funds are like unregulated private investment clubs for well-heeled investors who can put up lots of money and pay high fees in return for what are often above-average returns.

Clifford says that when a hedge fund targets a company and buys up a lot of its stock, the fund often becomes a shareholder activist by monitoring the top managers and directors, and their decisions and actions.

When this happens, all shareholders benefit, Clifford says.

“When a hedge fund activist targets a publicly traded firm, the firm’s stock price and accounting performance increase sharply,” he says. “Firms targeted by hedge fund activists typically outperform the S&P 500 by 10-15 percent in the year they are targeted.”

So if you are a shareholder of the targeted firm, you will benefit, too, even if you can’t afford to join the club.

Clifford says there has been “bad behavior” by a few hedge fund managers, but “the overall influence of the industry on the marketplace is constructive and helpful. The average hedge fund is down about 15 percent year to date,” he adds, “while the average mutual fund or index is down over 30 percent.”

This entry was posted on Friday, November 14th, 2008 at 5:53 pm and is filed under Investing, University of Kentucky. You can subscribe via RSS 2.0 feed to this post's comments. You can comment below, or link to this permanent URL from your own site. Your comments will appear immediately, but I reserve the right to delete innapropriate comments.