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I heard an interesting interview on the BBC Business Daily about the performance of Hedge Funds.

You can find and listen to it here;
http://www.bbc.co.uk/programmes/p00pdhm2

Essentially, the author of some new book crunched some numbers and determined that 84% of all Hedge Fund profits stay with the mangers and investment companies, but when you factor in fees and other intricacies, it is much worse. The author estimates that the Hedge Fund industry has returned about 2% for investors.

This section is followed up by a rebuttal from a Hedge Fund manager claiming that 2% is better than most other equity investments out there. He further claimed that many mutual funds would be negative return on investment after fees and such.

Obviously, this was a brief interview, so I'm pretty sure the issue is more complex, but this was a very disheartening set of interviews anyway.

It gets pretty complicated because there's so many kinds of hedge funds. A hedge fund taking money from random people on the street is way more likely to give you crap all back than a hedge fund with a lot of the owners money in it, who brings in select big money accounts (though as Madoff shows that kind of 'prestige' fund has it's own problems).

But basically, be wary of anyone who claims they can outperform the market, and wants to charge you a premium to try and do it. Basically there are two ways to 'beat the market' - having inside information or by accepting a high level of risk. If someone actually has a regular supply of inside information, then they're going to be dealing with serious money from seriously rich people, not banking on the $20,000 your favourite auntie left you. And if the fund manager is taking on high risk, all that means is he'll be sharing the profits with you in the good times, and handing you all of the loss in the bad times.