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Investors Lose by Chasing Top Performing Hedge Fund Strategies

Posted by: Ben Levisohn on August 18, 2009

Being rich doesn’t necessarily make one financially savvy. Annie Liebovitz defaulted on a loan she had almost no chance of paying back. Elie Wiesel, Mort Zuckerman and New York Mets owner Fred Wilpon were among Bernard Madoff’s victims. The Yankee’s Johnny Damon and Mets pitcher Mike Pelfrey were among the baseball players suckered into buying Allan Stanford’s CDs. And now we know the wealthy chase returns, just like poor schlubs.

How so? On Aug. 18, released its report on second quarter 2009 money flows in and out of hedge funds. Inflows into managed futures, a strategy that flows the trend in commodities, foreign exchange and other futures contracts, were up 3.14% from April through June, number three overall. (Top-ranked emerging markets were up 6.5%.) Assets at convertible arbitrage funds, which attempt to profits on price discrepancies between convertible bonds and stocks, fell 9.16%.

The problem? Convertible arbitrage has been one of the better performing strategies. Convertible arbitrage funds were down 24.6% after all the “normal” relationships fell apart). But they gained nearly 15% last quarter, the fourth best performing strategy. The worst? Managed futures, down 0.82% and the only fund category in the red.

Which isn’t to say there’s anything wrong with managed futures. The funds, touted as a “new diversifier,” were the best performing category during 2008 and many advisers say they have no problem with a small loss after last year’s 11.9% gain. But, as points out, investors were likely attracted by 2008’s bonanza and they’ll probably be shocked by this year’s loss.

Don’t they know past performance doesn’t predict future results?

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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