FORTUNE -- Usually Wall Street waits for a bubble before it pushes an investment on average Joes.
So it's certainly a change that the returns on the investment Wall Street is currently trying to sell to individual investors have stunk lately. Is that any better? Probably not.
Goldman Sachs (GS) recently announced it was launching its first mutual fund that invests directly in hedge funds. The private investment vehicles have typically been reserved for the ultra-rich. This Goldman fund, which will be called the Goldman Sachs Multi-Manager Alternatives Fund, will be open to anyone who can plunk down $1,000.
And Goldman is pushing the fund not just for risk-averse investors looking for a flyer for some extra cash, but as one that makes a sensible choice for your 401(k). According to a very reasonably worded press release, Goldman says the lack of access to hedge funds has left many investors with little exposure to alternative investments in their "retirement accounts." Says Goldman's Jason Gottlieb, who will be a co-portfolio manager of the fund, in the release, "Today's complex markets require sophisticated investment techniques that can enhance a traditional portfolio, and bring investors closer to their long term goals."
And if working longer is your goal, then hedge funds would be the investment for you, at least recently. Over the past five years, the average hedge fund, as measured by the HFRX Global Hedge Fund Index, has lost 9%. The S&P 500 (SPX) in the same time frame gained 21%. This year is more of the same. Hedge funds are up just over 5%; the market index, 14%. A recent study from Rob Arnott's Research Affiliates found that returns go down and risks go up when investors add hedge funds to a standard portfolio.
A mutual fund that invests in hedge funds could do even worse. That's because, unlike hedge funds, investors in mutual funds, based on the SEC's rules, need to be able to cash out whenever they wish. That doesn't work for every hedge fund strategy. "The challenge is that some of the best hedge fund strategies don't offer much liquidity," says Bob DiMeo, managing director at DiMeo Schneider, a consultant to institutional investors. "You still get the high fees, but instead you have an arm and a leg tied behind your back trying to get market beating returns."
The no-load Goldman mutual fund will have an annual fee of 3.3%, which is less than the average hedge fund, which takes 20% of profits on top of an annual 2% fee. But it's about three times what the average stock mutual mutual fund charges, and about 25 times the 0.13% a year that the average S&P 500 index fund charges.
Despite the poor performance, the amount of money pouring into hedge funds has continued to increase. Assets in the hedge fund industry have more than tripled in the past decade to $2.25 trillion. Much of the money coming into hedge funds recently have been from pension funds. Now Wall Street is betting it will be able to entice average investors as well.
Along with Goldman, Morgan Stanley (MS) recently launched has its own hedge fund offering in the form of a mutual fund. But unlike Goldman's fund, Morgan Stanley's AIP Dynamic Alternative Strategies fund won't invest directly in hedge funds. Instead, it will invest in other mutual funds that are trying to mimic hedge funds, as well as Morgan's "proprietary hedge fund replication strategy." In April, the SEC approved plans by private equity firm Blackstone (BX) to launch its own hedge fund-like mutual fund.
"There's not a lot of money to be made in telling people not to invest in hedge funds," says Simon Lack, a former JPMorgan hedge fund executive and author of The Hedge Fund Mirage, which was published last year. "Eventually persistently poor performance will drive people out, but it takes time."
In the face of the recent poor returns, hedge fund defenders typically say something like, yeah but, lots of things, including real estate and commodities, do worse than stocks over long-periods of time. But you don't know what will do well when. So a portfolio invested in hedge funds along with stocks and bonds and that other assets will better weather the market's ups and downs, guaranteeing more of your money will be there when you need it. The problem is unlike those other things hedge funds aren't really a unique asset. They are just a way to invest in those other things and pay high fees to do it.
You know what's done a lot better than hedge funds recently? Mutual funds. So maybe what we really need is a hedge fund that invest in mutual funds. But that would be silly, right?
T. Rowe Price and other mutual fund managers are fighting to stay relevant as investors shift away from actively managed funds. Is private equity a way out?
By Lauren Silva Laughlin
FORTUNE -- U.S. mutual fund managers have recently been on a tear as the stock market has climbed to 5-year highs. Higher equity prices mean fatter portfolios and more fees for the asset managers. But dig down deeper, and there MOREFeb 20, 2013 1:55 PM ET
In an effort to attract investors, bond fund managers are buying debt that's getting riskier by the minute.
Update: 1/16/13, 3:00 PM
FORTUNE -- Wall Street is in the process of turning one of its most plain vanilla investments - and one that average investors have flocked to in recent years because of its perceived safety - into ticking time bombs. Unfortunately, no one should be all that surprised. Wall Street does MOREStephen Gandel, senior editor - Jan 14, 2013 5:00 AM ET
Bruce Berkowitz and his Fairholme Fund have made a comeback - relying on the same stocks that cost his fund so dearly in 2011.
FORTUNE -- Only a handful of mutual fund managers have ever had the sort of epic run that Bruce Berkowitz (and his investors) enjoyed. In the first decade of this century, his 13.2% annual returns obliterated the S&P 500 (SPX), which averaged 1% yearly losses. He was MOREScott Cendrowski, writer - Nov 26, 2012 5:00 AM ET
The emerging-markets legend, who runs $45 billion at Franklin Templeton, is betting on China's growth.
FORTUNE -- Mark Mobius has picked up a variety of nicknames over the years -- the Pied Piper of Emerging Markets, the Globetrotter -- but all of them are inspired by the same fact: The 73-year-old has long been one of Wall Street's most adventurous investors. After more than four decades of investing in developing markets, MOREScott Cendrowski, writer - Oct 16, 2012 5:00 AM ET
If you want to take advantage of the Royce Select Fund's uniquely fair fees - sorry - that ship has sailed.
FORTUNE -- There are times when an innovative and brilliantly designed product takes the world by storm and makes a fortune for its creators and marketers. Think iPhone. And then there are times when an innovative and brilliantly designed product just doesn't catch on. Think of the Royce Select Fund.
Never MOREAllan Sloan, senior editor-at-large - Oct 10, 2012 5:00 AM ET
Innovative companies and strong sectors can trump shaky markets, says the Artisan Mid Cap fund manager.
By Amy Feldman, contributor
FORTUNE -- When the economy is stagnant, says Andrew Stephens, manager of the $6.3 billion Artisan Mid Cap Fund (ARTMX), only companies that innovate or operate in a thriving sector are likely to rise. Those are the qualities he's seeking these days. Stephens, 48, is a growth investor, though the description MOREAug 1, 2012 5:00 AM ET
Actively managed funds add value, but most of it may go to the managers' retirement funds, not yours.
Fortune -- A new study suggests that investing in mutual funds might not be a waste of money. It's lowly praise, but it's a better review of the popular investment vehicles than they have recently been getting.
The prevailing view these days puts the average mutual fund manager somewhere between dope and charlatan. Critics MOREStephen Gandel, senior editor - Jun 27, 2012 6:00 AM ET
His investment style may be hot these days, but Federated fund manager Daniel Peris views it as the oldest way to play the market.
FORTUNE -- Daniel Peris is a dividend purist. It's not just that he hunts for companies able to deliver high returns via dividends. It's that he views dividends as the fundamental drivers of the stock market. In his view the size of the cash payouts and MOREScott Cendrowski, writer - Mar 28, 2012 5:00 AM ET
The manager of the country's top-performing mutual fund is a reclusive former biochemist. What's his secret?
By Mina Kimes, writer
FORTUNE -- Who is James J. Wang? It's one of the most intriguing questions in the mutual fund world today. Over the past five years, Wang's tiny Oceanstone Fund (OSFDX) has outperformed every single mutual fund in every category -- and it's not even close. His 40.5% annualized return since 2007 is almost MOREMar 12, 2012 5:00 AM ET
|The Deep Web you don't know about|
|Pizza chain Sbarro files for bankruptcy|
|Colorado gets $2 million from marijuana taxes|
|AT&T cuts prices again|
|More trouble for Boeing's Dreamliner|