Warren Buffet believes that a passive S&P 500 index-based fund is a better investment than a carefully managed hedge fund. He has a point. The market is saturated with expensive funds that deliver poor long-term results, but this doesn’t mean that all hedge funds are a bad investment.
Poor mutual fund performance is often attributable to unrestrained trading and exorbitant management fees. Passive index funds make it difficult for an investor to gauge volatility and opportunity costs. The difference between active and passive funds shouldn’t be an issue. After all, long-term results and low costs are all that truly matter.
Bull markets always make passive index funds seem like a good idea, but many don’t realize the dangers of a passive investment. Out of 1200 investors surveyed last year, only half of them understood how vulnerable these funds can be. Passive index funds are susceptible to the maximum level of losses and volatility during any downturned market.
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There are two key characteristics of a well-managed hedge fund. Successfully managed funds have low expenses and a high degree of manager ownership. When managers invest their own money, their funds tend to outperform market indexes. There is nothing strange about outperforming the market average. Successful investors are doing it every single day around the world.
Tim Armour has been Chairman of Capital Group since July 2015. Capital Group has become one of the world’s foremost investment management organizations. Capital Group was founded in 1931, and currently holds more than $1.39 trillion in assets.
Tim Armour has acquired more than 34 years of investment experience working for Capital Group. He began as an equity investment analyst covering global telecommunications and service companies. He was also a participant in the Capital Group Associates Program. He attended Middlebury College, where he completed a bachelor’s degree in economics.
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