Hedge funds have not eroded market opportunities for longer-term investors. Many investors incorrectly assume they cannot compete with hedge funds in the marketplace and that the odds are stacked against them. There are some strategies such as high-frequency trading that investors cannot compete with; still, even though hedge funds have grown in their influence on the market, there are still opportunities for investors seeking to grow their wealth for the future.
Growth of Hedge Funds
The number of hedge funds has grown substantially since 2000. There were slightly over 2,000 hedge funds in operation in 2000. That number grew to over 10,000 funds by 2014. The amount of assets under management (AUM) for hedge funds has also grown from around $500 billion in 2000 to over $2 trillion in 2014. Most hedge funds seek to create alpha for their investors in different types of market conditions. Not all hedge funds are successful; in fact, many fail to provide better performances than simple market index funds. This indicates there is still money to be made in the markets for ordinary investors.
Value Investing
One significant opportunity for investors is value investing as championed by investing guru Warren Buffett. Value investing is a long-term investment strategy that seeks to identify undervalued companies with the potential for growth. Value investors buy companies that have fallen out of favor with the market for whatever reason and are trading below their intrinsic values.
Value investing requires capital, education, research and some time to follow the markets. However, since investments are made on a long-term basis, there are limited trading costs. Value investing does not try to identify short-term trades and is not constantly jumping in and out of the market. This makes the strategy available to individual investors.
Index Investing
Another strategy available to investors is index investing. Index investing uses index funds to track the major stock indexes such as the S&P 500, the Dow Jones Industrial Composite and the NASDAQ. History shows stock indexes generally go up over time. However, there are definitely substantial drawdowns such as during the 2008 financial crisis. Still, the equity markets have generally grown. In fact, Warren Buffett recommends most investors invest in a low-cost index fund. These index funds provide diversified exposure to companies in many different sectors.
Fixed-Income Investing
A more conservative strategy for individual investors is fixed-income investing. Fixed-income investors buy bonds and other fixed-income securities to profit from the payment of interest. Bonds generally have less volatility than stocks and other asset classes. There are numerous types of fixed-income securities in which to invest.
There is still risk in investing in bonds such as interest rate risk and credit downgrade risk. Further, fixed-income securities have paid minimal interest in the low-interest-rate environment since the 2008 financial crisis. However, for more conservative investors, fixed-income securities provide the opportunity to create a stream of income from interest payments.