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Learning, Sharing, and Teaching => Investor Alley => Topic started by: econberkeley on August 22, 2013, 03:31:41 PM

Title: hedge funds anomaly
Post by: econberkeley on August 22, 2013, 03:31:41 PM

S&P 500 index is beating average hedge fund for several years, but I am not seeing any big outflows from hedge funds overall. Hedge funds were especially beaten down this year. They returned 4% vs S&P 500's %20 return.  It does not make sense. What do you guys think?
Title: Re: hedge funds anomaly
Post by: Numbers Man on August 22, 2013, 03:39:28 PM
I think that's what what mean on CNBC when they say "dumb money", lol.
Title: Re: hedge funds anomaly
Post by: Johnny Aloha on August 22, 2013, 03:49:59 PM
And people laughed at Warren Buffett when he bet a hedge fund manager (forget who) that the S&P would outperform hedge funds over a 10 year period!
Title: Re: hedge funds anomaly
Post by: KingCoin on August 22, 2013, 04:10:01 PM
The idea of a hedge fund is to deliver positive RISK ADJUSTED returns (hopefully at a high Sharpe ratio). They're not "beat the S&P 500 every year funds".

I'm not saying hedge funds as a whole have or have not delivered on that promise (you'd have to consult the historical track record), but comparing hedge funds' returns to the one year return of the S&P 500 is missing the point. Equities have been on an absolute tear recently, so I'd fully expect them to have outperformed hedge funds. In a flat or down period, HF's are likely to outperform.

Over a 10-20yr period, I'd expect equities to outperform partially because they're higher risk, and partially because of the very high fee structure of HF's. That doesn't mean they aren't a good part of a diversified portfolio (many of the most celebrated asset managers like Swensen view alternative asset classes like HF's, PE, and VC as important), but the point is moot for most retail investors who won't have access to HF's, especially on a diversified basis.
Title: Re: hedge funds anomaly
Post by: Bank on August 22, 2013, 08:23:08 PM
KingCoin beat me to it.  There are many private investment vehicles and they do so many different things that to speak about them as a group is almost meaningless.  However the goal of many is still to reduce risk --- hence the "hedge" in hedge fund.  For example, so-called market neutral funds have no interest in beating the S&P 500.  They commonly employ long/short strategies that are almost certain to cause them to lag the stock market in up years.
Title: Re: hedge funds anomaly
Post by: Le Dérisoire on August 23, 2013, 07:20:36 AM
For instance, a hedge fund could attempt to have a volatility similar to a bond portofolio, but without the sensibility to the market interests rates. This hedge fund would be expected to underperform the S&P.
Title: Re: hedge funds anomaly
Post by: Mr Mark on August 23, 2013, 08:28:54 PM
It seems the biggest edge the hedge funds had was inside information. As that is getting taken away their returns are returning to market less excess fees. They still exploit some tax loopholes to force a slight above market potential, but it does seem they were mainly just smart crooks....