For many investors, entry into hedge funds is only a dream – like St. Tropez, they are the playgrounds for the rich. But exchange traded funds (ETFs) are looking to change that by introducing funds that track hedge fund performance. However, before you go diving into the world of the rich, make sure you understand how they work.

One of the key selling points of hedge fund ETFs is that their management fees are significantly lower than the traditional 2/20 fee structure of hedge funds, reports Michael Sisk of Barron’s. Hedge funds typically charge a 2% fee on top of 20% of the profits.

But one of the hardest selling points is the fact that these ETFs are trying to mimic the performance and strategies of funds that provide very little public information about their holdings. On top of that, hedge funds tend to move in and out of investments very quickly. [Are Hedge Fund ETFs the Future?]

A testament to the difficulty in replicating hedge fund performance can be seen in the ETFs that exist today. Among six representative ETFs that track hedge funds, the top performer in Q1 of this year returned 2.4%, but it’s worth noting that we’ve been in very challenged markets lately. Compare that to the 2.6% return of an index of hedge funds calculated by Hedge Fund Research and the 5.4% return of the S&P 500. The next highest performer in the group of six returned just 1.8%.

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