All The Hedge Fund Bashing

There’s been a whole lot of hedge fund bashing taking place in the financial media and among the Twitterati lately. And I don’t even mean bashing the managers for various legal indiscretions which in my mind they deserve even more flack for than they get. I’m talking about their returns and fee structures.

And like normal, the financial media and associate peanut gallery have used a far less than nuanced approach to their trolling. No, let me put that differently, they’ve once again made themselves look like idiot dogs chasing after cars in the street.

Yes, many hedge funds are not worth investing in.

Yes, only 5% of hedge funds lead the S&P 500 this year.

Yes, the 2 & 20 fee structure is wrong for most people.

But let’s just start out with the fact that the point of a hedge fund is not to beat some arbitrary index of stocks called the S&P 500. If you are investing in a hedge fund with this goal in mind, a relative return, you deserve to have your investment stash pillaged by high fees and corrupt managers. So let’s just put to rest right now that measuring a hedge fund or group of hedge funds against the S&P 500 is in any way a rational determination of the value of investing in said hedge fund.

Second, why the hell are you lumping all hedge fund strategies into one bucket and saying that they are underperforming said irrelevant index? It’s like saying that a heart surgeon and a brain surgeon both did a horrible job at removing the bunion on your foot. Different strategies are meant to achieve different things, and whoever put together the HFRI index didn’t do it because it offered any real value to anyone, it was a marketing ploy. Now, if you want to lump all the stat arb guys together, all the merger arb guys together, all the long/short equity guys together…awesome, that’s helpful as a benchmark. So please, stop quoting at insanely stupid index.

Third, most hedge funds suck, just like most mutual funds suck, just like most individual investors suck. Referencing any statistic that is an aggregate of each of these three groups is gonna blow. That’s because on average, everyone sucks. Why? Because money management, unlike any other discipline on earth, seems to be the one place where people think that anyone can just do it. You wouldn’t walk into an operating room and perform brain surgery would you? But of course anyone can trade can’t they, and they do, every day, as if it’s just that easy.

Investing at any level is fucking hard, and unlike performing brain surgery anyone can and does try. That means hedge funds too, most of them suck because most of them shouldn’t exist.

And as for the fees, please. The point of the fees is that a good hedge fund manager is supposed to generate absolute return of a certain level, with high water marks. A good manager who actually manages risk and performs his job well deserves every penny he gets in those performance fees and you are lucky to have him take your money. Good managers who were managing risk didn’t fuck it up in 2008, and they saved you a ton of money. My former boss, David Geller, may he rest in peace, was one of them. I know many others who got out of the way because they followed their plan, which was to manage risk, which is what a hedge fund is supposed to do.

Now, the normal retort to my line of thinking is that it’s hard to find the good managers, and you’ll end up chasing performance as an indicator of future performance as investors normally do, and it’s hard to get into the good funds. All good points, but certainly not an excuse to label hedge funds across the board bad investments if they suit your financial goals and situation.

If you do your homework, get to know the managers, understand their strategies, where they are in the life cycle of their career and the growth of their fund, they can be excellent investments. If you are a moron and don’t do your homework, you’re going to end up wasting your money on one of the 80-90% of funds that are not worth investing in.

 

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