I have an article at Bloomberg View, about how there's not really much that's special about hedge funds:
The recent release of Institutional Investor Alpha’s hedge-fund survey has everyone asking how the fund managers continue to make so much money. Academics and journalists alike point out that hedge funds, as a class, haven’t delivered above-market after-fee returns for quite some time. Hedge funds, of course, get paid whether the market goes up or down, so the real question is why hedge funds continue to receive large inflows of capital from pension funds and other investors. The New Yorker magazine’s John Cassidy has a good roundup of the most prominent theories. He includes some good links to research on the question of whether hedge funds deliver superior risk-adjusted returns, or offer significant diversification potential.
But the real question is: Why would people expect hedge funds to deliver superior returns in the first place?Read the whole thing here!
The problem is you're bundling together the fat head and the long tail and making a conclusion about the whole group. Yeah, the shitty hedge funds suck--but the best ones outperform, year after year after year. On this topic, I recommend the book "More Money than God".
ReplyDelete"you're bundling together the fat head and the long tail"
DeleteHa ha ha! Nice try, but reading the article reveals:
"this doesn’t mean there aren’t hedge-fund managers who can beat the market. As in the venture-capital industry, there seem to be a few superstars who really can deliver superb performance, year in and year out."
Hedge funds are a cyclical phenomenon likely related to low NGDP growth and high asset prices. (The cause of which would be great to figure out.)
ReplyDeletehttp://research.stlouisfed.org/fred2/graph/?g=BhU
It's cyclical. We had a hedge fund boom in the 1960s also, and of course investment trusts in the 1920s and 1870s.
(Speculatively) consider that there may be under-the-counter benefits, to asset allocation decision-makers personally, and for the larger organization: money guys are smart and will work to extract value from relationships: it's just that you don't see it.
Organizationally, getting plugged into the most consequential information nexus on the globe -- the sub-rosa, lightly-regulated, non-national, hedge fund/central bank/commercial bank information flow -- may benefit all your portfolio decisions.
In other words, ivesting in a hedge fund may simply be a price of admission to the charmed circle of "what do they intend for us" information.
OT, but it is rare when an economist also inspires fashion!
ReplyDeletehttp://www.cafepress.com/cp/customize/product2.aspx?number=1303689083
"Economists"? All I see on the back are a couple of political philosophers. And not even very good political philosophers at that.
DeleteOT #1: I liked your refutation of Buddhism on Miles Kimball's blog.
ReplyDeleteOT #2: "nquixote"?! Is this another one of your awful puns?!
1. Thanks!
Delete2. Well, I thought "nsmith" would be taken, and I didn't want to be "nsmith1871" or whatever.
I mentioned this over at Bloomberg on your essay, but I think they're Vanity Finance. They appeal to rich, egotistic investors and badly informed institutional ones that by signing up with a Hedge Fund, they'll get Super-Special Treatment and a Great Deal as provided by brilliant money managers, unlike those sheep who put their money into passively managed Mutual Funds. Rich people love personalized service.
ReplyDeleteHard to beat the boring S&P 500. Even the best traders can it for awhile but then they give up most of it in a bad streak . Except buy and hold the S&P, 500 all strategies, save one, have fatal flaws.
ReplyDeleteI recently came across a forthcoming Journal of Finance article, "Money Doctors" (by Gennaioli, Shleifer and Vishny) that offered a take on why people invest their money with asset managers (not hedge funds in particular, though) in spite of outcomes that are not particularly impressive.
ReplyDeleteTheir answer, simple as it is, strikes me as fairly convincing: People invest with asset managers because of trust. Just like most people don't understand medicine - and therefore put their trust in the doctor - most people also don't understand finance, and so hand over their funds to "money doctors".
I did a post about that paper a while back! I think it's a good insight.
DeleteHuh? Why this now? I thought it was old news that index funds beat managed funds hands down, and with lower fees/costs to boot???
ReplyDeleteYes, it is strange given that a simple long-only golden cross system has outperformed the market consistently in the last 14 years: http://www.priceactionlab.com/Blog/2014/04/passive-investing-fables/
ReplyDeleteInvestors only need to be able to calculate a moving average crossover. The reason they invest with hedge funds is either lack of knowledge of even simple principles or lack of discipline. Hedge fund managers are paid for their discipline in following some investment method or for their knowledge or both.
The larger the share of investment managed by hedge funds, the more closely they will track the market.
ReplyDeleteInvestment management does not scale. Successful management techniques for one capital level will not be appropriate for amounts 100X larger or more.
Hedge funds can offer significant tax breaks, especially to non-profits.
jonny bakho