Hedge Funds Miss the Boat Again

D

dealmaker

Posted inHidden Values Alert,S&P 500,Warren BuffettByCharles MizrahiOn April 11, 2016


Hedge funds had another miserable year in 2015.

While the S&P 500 index was up 1.2%, the average hedge fund lost 3%.

This was on top of several years of sub par performance.


Hedge-Fund-Complexity.jpg


http://insiderwealthalert.net/hedge-funds-miss-the-boat-again/
 
There was a recent article in the WSJ where pension plans are pulling their money (by the billions) out of hedge funds due to lackluster performance. I think the disaster with VRX which garnered major headlines didn't help the hedge fund industry.

This article mentions that the failure to generate alpha by hedge funds was widely known as back as 2006...

http://www.nakedcapitalism.com/2016...ndon-hedge-funds-more-than-a-decade-late.html



This paragraph sums it all up...

"...However, as of 2006, it was already fairly reported in the financial trade press that hedge funds did not deliver much if any alpha. Indeed, the hedge funds were increasingly acknowledging that and stressing that irrespective of that nasty little lack of any real alpha problem, they were still an essential addition to any savvy investor’s portfolio by virtue of providing “alternative” or “synthetic” beta.

But there’s no justification for paying “2 and 20” for alternative beta. And as we noted in early 2007, investment products were being launched that delivered alternatve beta at much lower fee levels."
 
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ETcallhome said:
high net worth individuals don't invest in hedge funds to outperform the market
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You're correct insofar as this was the intention of the first hedge fund, in fact called a "Hedged Fund", in 1949.

That said, clearly expectations have changed over the years: both the holdings and the high fees indicate that hedge funds are expected to significantly outperform the market by much (if not most) of their customer base, whether they will explicitly admit it or not. The hedge fund field is overcrowded and IMO the typical fund isn't adding much more value than mutual funds did in previous decades, yet is charging far higher fees.

Moreover, hedge funds in the 1990's and even the early 2000's were a good way to get exposure to consistently and obviously outperforming managers (e.g., Renaissance Technologies). Now, many of those top managers have amassed fund-sized fortunes of their own and have therefore gone totally private, depriving the available management pool of much of its proven top talent.
 
Occam said:
You're correct insofar as this was the intention of the first hedge fund, in fact called a "Hedged Fund", in 1949.

That said, clearly expectations have changed over the years: both the holdings and the high fees indicate that hedge funds are expected to significantly outperform the market by much (if not most) of their customer base, whether they will explicitly admit it or not. The hedge fund field is overcrowded and IMO the typical fund isn't adding much more value than mutual funds did in previous decades, yet is charging far higher fees.

Moreover, hedge funds in the 1990's and even the early 2000's were a good way to get exposure to consistently and obviously outperforming managers (e.g., Renaissance Technologies). Now, many of those top managers have amassed fund-sized fortunes of their own and have therefore gone totally private, depriving the available management pool of much of its proven top talent.
More...
true, most would be better just buying a low cost index funds, but they don't even want to do that, too much time away from what they do. They want to be introduced to a fund manger by a trusted friend and just turn it all over and tell them, here! you manage it! And in times of finanacial crisis they don't want to be watching cnbc. 2/20 is huge sum of money over a lifetime, but some of these athletes have very short earning life and by midlife they can manage their money a little more closely, and then yes, for 2/20 you better be outperforming the index.
 
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