Costa Rica Investing Offshore – What’s the Difference Between Hedge Funds & Mutual Funds?

Regular mutual fund managers are salaried employees of a firm and they invest according to strict guidelines. They are normally paid a bonus based on the total assets under management whether they make you money or not.

They are normally ‘long only’ and fully invested at all times which means that they can only make you money when markets go higher.

However, a few of the world’s most successful portfolio managers have stopped being ’employees’ of mutual fund companies and have become ‘owners’ of their own offshore hedge funds.

There are over 10,000 offshore hedge funds with assets of approximately US$960 billion.

These hedge fund managers often have the bulk of their personal net worth tied up in their own fund and as ‘owners’ they have a definite interest in making money and not losing it.

Many hedge funds charge ‘2 & 20’ which means they will charge 2% per annum to cover the costs of managing the portfolio and they will keep 20% of the net annual gains in the portfolio. This is how world-famous hedge fund managers like George Soros and Julian Robertson became billionaires.

Some mutual funds and hedge funds have similar investment strategies. However, the majority of mutual funds have a ‘long only’ investment objective which means they invest in something, watch it go higher (hopefully) then sell it at a profit.

In mutual funds, there is little activity in down or sideways moving markets. On the other hand, hedge funds are often more flexible and may switch between stocks, bonds, commodities, currencies, futures, options and can react quickly to changes in the market place enabling them to potentially profit from a wider range of market conditions and a broad range of financial instruments.

Some funds may use leverage. At one time, there was a spurt of offerings of ‘principal guaranteed’ hedge funds but record low interest rates stopped that.

This was where a major bank or insurance company would guarantee that even under the worst of circumstances your initial investment will be returned to you after a certain period (normally five to seven years).

In bull markets, the best hedge funds tend to perform slightly better than the best mutual funds. In weak markets the best hedge fund managers tend to significantly out-perform the best performing mutual funds.

This is because it doesn’t just ‘sit there,’ they are just as comfortable ‘shorting’ the market and making money as markets fall as they are going long and making money as markets rise.

According to Van Hedge, a leading authority on onshore and offshore hedge funds from January 1st 1988-September 30th 2003, the average offshore hedge fund achieved a net compound annual return of 14.3% per annum; whilst the average Morningstar equity mutual fund achieved 9.2% per annum; and the S&P 500 returned 11.9% during the same period.

Hedge funds in aggregate, in most multi-year periods, have provided both superior returns and lower statistical risk than the S&P 500 or mutual funds. In the 15.75 years ended September 30, 2003, both U.S. and offshore hedge funds have achieved higher net compound annual returns, lower standard deviations, lower Van Ratios© and higher Sharpe Ratios than either the Morgan Stanley Capital International World Equity Index, the S&P 500 Index, or the Morningstar Average Equity Mutual Fund.

In a nutshell, the majority of mutual funds will make money only when markets go higher, but the best hedge funds will make money when markets go higher and also when markets go lower or at the very least, their losses should be smaller…

Just as importantly, although a mutual fund manager will often make money whether you make money or not, a hedge fund manager will only make serious money after he’s made serious money for you.

The bad news is that many of the best hedge funds are closed to new investors and often have high minimum investments ranging from US$50K to US$10 million, depending on the manager.

The good news is that there are more and more choices for the fund investor so that he or she can also profit in up and also in down markets.

If you would like to see more about the offshore investment book written by Scott Oliver please visit Costa Rica’s Guide To Making Money Offshore or, if you would prefer to read a client’s letter please see Costa Rica Investing in Offshore Funds.

This offshore investment book and the offshore strategies implemented are available to non-US citizens/residents and non-Canadian residents only. Canadians legally resident in Costa Rica and other nationalities may apply. Or, please feel free to contact us here

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Andrew Makarik

to@welovecostarica.com

Andrew Makarik is the main editor of WeLoveCostaRica, a fan of this sunny country. He is also a loving husband and a has a lovely daughter. By being a devoted family man and the biggest Costa Rica fan, he wants to make more people feel at home there. WeLoveCostaRica unites people and helps them find new home or a new travel destination. This website is a friendly community where everyone can find not only information, but also new friends and travel pals. Andrew is also passionate about IT and programming, so he himself maintains a friendly atmosphere in this cozy environment of WeLoveCostaRica.com.