​Most hedge funds have a 2-and-20 fee structure: A 2% management fee on the assets—a 20% performance fee on the profits. Whether the market goes up, down, or sideways, the management fee is paid. In the long run, it's even worse.

​The higher the management fee, the lesser you will have after 40 years. In reality, it's even worse - No hedge fund can guarantee a constant return of 8%. Turnover costs and taxes will further reduce your returns.

​Suppose you invest $100k at age 25 with a hedge fund that makes an 8% profit every year. You are charged 1.5% on assets, and a 20% performance fee. When you retire at 60, you will have $764k. But your manager will have $1.24MM - at no initial investment!

​

​On the other hand, with a low-cost ETF that returns just 6% with an expense ratio of 0.1%, you will make $933k after 40 years - $280k more than a 2&20 fund. A hedge fund will beat you in 17 years on average. But an ETF would take 1500+ years to do the same!

​Classic Warren:

​Warren Buffett always recommends buying into the S&P 500 over picking stocks. But in 2005, he raised the stakes with a $500k bet: "Nobody can select a set of at least 5 hedge funds that would match the S&P500 over ten years." Only one person took up the bet - Ted Seides.

​So what happened to Buffett's bet?

​Ted Seides picked 5 funds-of-funds, investing in over a 100 hedge funds. In 10 years, the 5 funds made 2.2% on average - before fees. 60% of those gains were diverted to managers. The S&P500 returned 7.1% - and won hands down.

​Not all active funds underperform - But for the average investor, it's very hard to pick the right ones. In fact, Buffett believes so strongly in the S&P 500 that 90% of what he leaves for his wife will be invested in the S&P 500, not even Berkshire Hathaway!

​If you're invested in a low-cost ETF, good for you.

​If not, maybe it's time to take another look at those fees.

​In conclusion:

​You have two options to invest your money long-term: A hedge fund with an 8% return and an ETF with a 6% return.

​Choosing the right one can save you $280k more before retirement.

​That's an extra ten years of spending!

​So which one should you choose?

​​​Cheers!

​​​​​​​​​​​​​​​​End-Week Wisdom:

​"Fees never sleep." - Warren Buffett

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