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By Jason Kephart | 05-04-2016 10:00 AM

Don’t Get Caught by Funds of Hedge Funds Costs

A low-return environment has stifled these pricey funds, and investors would've been better served by a low-fee bond ETF, says Morningstar’s Jason Kephart.

Jason Kephart: A low-return environment and high fees is a terrible combination for investors. Nowhere has that been more evident than a subset of the multialternative category that allocates to various hedge fund strategies.

These multistrategy funds charge on average 2% and sometimes even more in management fees. That means you've not really been getting much of a discount on the traditional hedge fund model, which charges a 2% management fee, plus a 20% performance fee.

For the high fees in these mutual funds investors have gotten near nothing in returns over the past three years. Over the same time periods, something like a low-cost bond ETF would have returned more than 2% and offered better downside protection in periods where stock markets were struggling. Something like the Vanguard Total Bond Market ETF, which charges just 6 basis points, is a great alternative to these alternative funds.

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