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Health & Fitness

The Rise of the Funds

If you have paying attention lately to the stories beneath the headlines, as I always strive to do, I think there is a trend worth noticing. That trend is the shift that is taking place regarding mutual funds and pension funds, their investment strategies, and the reliance that they place on the major Wall Street Institutions and hedge funds. In the past the relationship worked in a relatively simple manner. The pension funds and large investment funds would form relationships with the major Wall Street Banks (WSB) – the funds would give the WSB funds to manage on their behalf. The WSB received capital to invest, manage, and generate fees off of, and these large institutional investors received above average returns in return for paying the fees charged by the WSB.

That is how it was supposed to work, but like the best laid plans, things don’t always work out.

In the wake of the financial crisis many of the so-called hedge funds and many WSB have struggled to produce returns in excess of index funds and the stock indices as a whole. If these institutions are not able to generate returns in excess of what investors can achieve through passive index investing, and charge fees on top of this, what is the financial benefit of utilizing these institutions? Taking a step back and seeing past the noise and fluff that often surrounds institutional investments and their broker relationships, it becomes clear that there is a very limited benefit for institutions to utilize hedge funds and WSB to manage their investments.

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This has not gone unnoticed.

Pension and mutual funds have large amounts of assets to manage, and a fiduciary duty to do so in the best interest of the fund stakeholders. By the sheer nature of their size there are some funds that carry enough clout to move markets simply by the nature of their investments, and can afford to hire their own investment professionals to manage these investments. Some funds have begun to do just that – while this is still a transitional period I do believe that this is the beginning of paradigm shift in the way that large institutional investors do business. Some funds are leaning towards passive investments, i.e. buying large blocks of shares in a company they feel is a good investment and not participating in management in any material way. Others are shifting towards a more active investment strategy, i.e. purchasing entire firms or partnering with other large institutional investors to reform/overhaul struggling companies.

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I think this is a big story that can have powerful implications for the market, investments, and possibly your money.

What do you think?

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