Hedge funds had a bar year; so is there a better time for investors to get in?

When Should You Invest in Hedge Funds?

It’s been a bad year for hedge funds, rivaling the financial crisis year of 2009. Despite the roaring bull market, many funds have paltry gains, some have big losses. So for many investors this has been an unhappy time to invest in hedge funds.

According to a recent Bloomberg article. meager returns caused massive shutdowns in the industry. With average industry returns of only 2% this year, 461 funds closed their doors in the first half 2014. While the S & P 500 has risen more than 150% in the last 6 years, equity hedge funds have averaged little more than 40%.

So if it’s been a bad time to invest in hedge funds as this bull market has been roaring, when would be a good time?

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Remember What Hedge Funds Do

Hedge funds cater to wealthy clients, most of whom have a net worth well over $1 million. The funds usually take both long and short positions, and often make big directional bets on the markets. They seek to profit in any kind of market, bull or bear.

While many of the funds hold positions in recognizable stocks, such as going long eBay Inc. (EBAY ) or Alibaba Group Holding Ltd (BABA ), or short, say, JC Penney Company Inc. (JCP )) or Herbalife Ltd (HLF ), funds also tend to hold more exotic positions. They might buy or short, for example, distressed securities or high-risk corporate bonds.

Hedge funds attempt to maximize profit and minimize, or “hedge,” risk. They can be highly leveraged. Many hedge funds also charge 2% management fees and take 20% of the profits.

Why Invest in Hedge Funds at All?

Not only have the returns been meager for many of the funds, for some they’ve been downright dismal. Woodbine Capital Advisors closed down this year after its assets melted away to $400 million from $3 billion in 2010. Other funds remain open but struggle. York Capital lost 6% during October, which reduced its year-to-date gain to 1%. Commodity funds that went long oil, plunged.

Managers cite the macro trends of low interest rates and low volatility as factors keeping results down. But with such poor returns across the board, why even invest in the funds at all? Indeed, thats the kind of sentiment weve seen, based on the many investors who withdrew their funds.

But that doesnt mean hedge funds are going extinct