In the third quarter of 2016, hedge fund investors withdrew an estimated $28.2 billion overall from these investment vehicles. This is the largest withdrawal that has been seen from the hedge fund side of the market since right after the housing market collapsed in 2008. This outflow of money is equal to about 0.9 percent of the entire hedge fund industry in the United States, which is actually a huge drop in this particular area.
Some analysts believe that this large drop in investment capital is because of the fact that investors are getting fed up with the high costs associated with funds. We see mutual funds often having costs of 2 to 5 percent per year, but hedge funds range much higher than this, going from about 4 to 8 percent when it comes to annual costs. With many low or no-fee brokers being in existence, investors are starting to take matters into their own hand. This can be a good thing, and there is even benefit for the average trader to do so. This is why we’ve seen trading methods like the use of binary options become so popular lately.
But this is not the only thing that is going on within the hedge fund business. Some of this has to do with the uncertainty and fear that is so prevalent within the market right now, but before we look at this, we need to ask a big question: Why do hedge funds matter for the average investor or trader? If a bunch of rich people take money out of the market, what does it really matter to you and me?
Most people don’t have access to hedge funds because of the fact that the entry requirements are so restrictive. According to FINRA, to invest money in a hedge fund, you must have a net worth of at least $1 million, or have a total number of investments of at least $5 million. However, most hedge funds have minimum investment requirements beginning at $500,000 which weeds out many of the investors that just barely meet those requirements. However, because of the fact that hedge funds use many trading strategies that are not employed in traditional funds, we can learn a lot about trading over the short term just by observing the actions of the most successful hedge funds.
The fact that money is being taken out of hedge funds on a grand scale indicates that a lot of the most sophisticated of large scale investors believe that the market is going to begin dropping in the near future. Of course, this is just a prediction, but it is an educated hypothesis, and one that is worth looking at. If prices do drop, many hedge funds have the ability to profit off of this, either by selling stocks short, or by moving funds into other assets that move in reverse of stocks, like what we see happen with gold.
Money is moving out of hedge funds, but that doesn’t have much to do with the practices of the funds themselves, but more with the fear that investors have. As you know, binary options trading can often allow you to mimic the moves of hedge funds, but without the huge entry restrictions. Many brokers allow you to execute trades with as little as $1 per trade, if you wish. So while the experts make large scale decisions in hedge funds, we can make many of the same moves in the binary options market. Paying attention to these trends can help us calculate our next move as traders and turn the fear that we are seeing grow stronger in the U.S. marketplace into personal profits.