Why would anyone buy hedge funds?

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Jerilynn
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Why would anyone buy hedge funds?

Post by Jerilynn » Thu Dec 15, 2011 12:00 pm

I don't get it. The typical fees are 2 and 20 [2% of assets and 20% of profits]. For the ones brave enough to report their returns, on average, they lag the market. I can only imagine how lousy the ones are that don't report. They aren't as liquid as mutual funds.

Why would anyone get into a hedge fund?
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)

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Re: Why would anyone buy hedge funds?

Post by magician » Thu Dec 15, 2011 12:06 pm

They think that this hedge fund will beat the market big time.
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Re: Why would anyone buy hedge funds?

Post by chaz » Thu Dec 15, 2011 12:09 pm

Risk = reward ?
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Re: Why would anyone buy hedge funds?

Post by DesertDweller » Thu Dec 15, 2011 12:19 pm

Jerilynn wrote:I don't get it. The typical fees are 2 and 20 [2% of assets and 20% of profits]. For the ones brave enough to report their returns, on average, they lag the market. I can only imagine how lousy the ones are that don't report. They aren't as liquid as mutual funds.

Why would anyone get into a hedge fund?
I was in a hedge fund, but just cashed out. Why? Because my investment advisor hawked it in a very convincing way and I bought the pitch. But it was a mistake. I think I wound up losing about $25K over three years on an investment of $220K.

The idea is that these hedge fund guys have access to investments that the ordinary Joe can't get into, but for that "privilege" you pay through the nose and the hedge fund managers get rich over the fees (not the investments they put you into), which they collect whether or not they make money for clients.

One of the many mistakes I have made listening to a professional investment advisor.

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Re: Why would anyone buy hedge funds?

Post by 3CT_Paddler » Thu Dec 15, 2011 12:22 pm

Because your country club buddies do it?

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Re: Why would anyone buy hedge funds?

Post by Liquid » Thu Dec 15, 2011 12:26 pm

Prestige, exclusivity, greed.

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Re: Why would anyone buy hedge funds?

Post by Sidney » Thu Dec 15, 2011 12:34 pm

Liquid wrote:Prestige, exclusivity, greed.
"
Hedge funds are "investment jewelry"?
I always wanted to be a procrastinator.

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Re: Why would anyone buy hedge funds?

Post by Jerilynn » Thu Dec 15, 2011 1:42 pm

3CT_Paddler wrote:Because your country club buddies do it?
Why not just SAY you are heavily invested in a super hot hedge fun and then do something more intelligent with the money?

Personally, I really am heavily invested in a super hot hedge fund that returned 37.2% annualized (net of all expenses) over the last 5 years. Unfortunately, the fund manager has closed the fund to new investors.
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)

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Re: Why would anyone buy hedge funds?

Post by xerty24 » Thu Dec 15, 2011 3:49 pm

Personally, I was heavily invested in a super hot hedge fund that returned 27.3% annualized over the last 5 years (net of all expenses and with some nice tax breaks too). Unfortunately, the fund manager has closed the fund. :D
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Re: Why would anyone buy hedge funds?

Post by xerty24 » Fri Dec 16, 2011 9:07 am

A lot of disappointment among the average hedge fund investor this year, but Renaissance's big fund is doing just fine:
the Renaissance Institutional equities fund had advanced 32 percent by December 9.
http://beta.finance.yahoo.com/news/inve ... 37669.html
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Re: Why would anyone buy hedge funds?

Post by AgnosticInvestor » Fri Dec 16, 2011 8:03 pm

There is a great demand for hedge funds, private equity, anything 'alternative,' among the rich. This is normally the result of a slick sales pitch by the 'wealth manager' employed by these people, usually under the guise of a 'total portfolio evaluation.' The lure of investing in something that the hoi polloi cannot is enticing, even necessary, for some. Obviously, investing is complex, and he who has an 'edge' will come out ahead, right? While most of the members of this forum know that this is nonsense, most very rich people do not.

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Re: Why would anyone buy hedge funds?

Post by rob » Fri Dec 16, 2011 8:06 pm

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Re: Why would anyone buy hedge funds?

Post by LazyNihilist » Fri Dec 16, 2011 8:48 pm

Liquid wrote:Prestige, exclusivity, greed.
Greed is common to almost all investments. :)
Any non greedy bogleheads around? :greedy
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Re: Why would anyone buy hedge funds?

Post by grok87 » Fri Dec 16, 2011 9:12 pm

Good comments, but I'll add one that hasn't been voiced yet.
"Why would anyone buy a hedge fund"?: FEAR of the market.

Investors generally become more conservative as they become richer. It's one thing to have a 60/40 portfolio when you have $100,000. Try doing it when you have $100 M! Watching that $60 M zig up and down with the market is tough I guess. So rich investors find the promise of market netural hedge funds to be attractive. Hedge funds often promise to deliver positive returns (alpha) that are not correlated with the market.

There are however a few problems as have been pointed out. One is the egregious fees. Two is that uncorrelated alpha is really tough to deliver (actually any alpha is really tough to deliver). Three is that often the market risk is not really eliminated-just stuffed into the tails. In other words the hedge fund returns look like they are uncorrelated to the market. But this is often only true in "normal" times. In extreme years like 2008 the supposedly eliminated market risk has a way of rearing its head with a vengeance.

cheers,
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Re: Why would anyone buy hedge funds?

Post by yobria » Fri Dec 16, 2011 9:52 pm

Jerilynn wrote:For the ones brave enough to report their returns, on average, they lag the market.
Can you site the source of this assertion? What market? Over what time period?

Nick

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Re: Why would anyone buy hedge funds?

Post by Jerilynn » Fri Dec 16, 2011 10:18 pm

grok87 wrote:Good comments, but I'll add one that hasn't been voiced yet.
"Why would anyone buy a hedge fund"?: FEAR of the market.

Investors generally become more conservative as they become richer. It's one thing to have a 60/40 portfolio when you have $100,000. Try doing it when you have $100 M! Watching that $60 M zig up and down with the market is tough I guess. So rich investors find the promise of market netural hedge funds to be attractive. Hedge funds often promise to deliver positive returns (alpha) that are not correlated with the market.

There are however a few problems as have been pointed out. One is the egregious fees. Two is that uncorrelated alpha is really tough to deliver (actually any alpha is really tough to deliver). Three is that often the market risk is not really eliminated-just stuffed into the tails. In other words the hedge fund returns look like they are uncorrelated to the market. But this is often only true in "normal" times. In extreme years like 2008 the supposedly eliminated market risk has a way of rearing its head with a vengeance.

cheers,
If I had $100M, i'd be 100% equities. Then I would form a foundation and give away any earnings.
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)

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Re: Why would anyone buy hedge funds?

Post by pkcrafter » Fri Dec 16, 2011 10:26 pm

yobria wrote:
Jerilynn wrote:For the ones brave enough to report their returns, on average, they lag the market.
Can you site the source of this assertion? What market? Over what time period?

Nick
I can't cite a source, but Larry S. has recently been writing about this.

Why would anyone buy hedge funds?

Because ignorant greed trumps common sense.


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When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Why would anyone buy hedge funds?

Post by Jerilynn » Fri Dec 16, 2011 10:30 pm

yobria wrote:
Jerilynn wrote:For the ones brave enough to report their returns, on average, they lag the market.
Can you site the source of this assertion? What market? Over what time period?

Nick

http://whitecoatinvestor.com/the-death- ... dge-funds/
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)

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Re: Why would anyone buy hedge funds?

Post by CABob » Fri Dec 16, 2011 10:50 pm

xerty24 wrote:Personally, I was heavily invested in a super hot hedge fund that returned 27.3% annualized over the last 5 years (net of all expenses and with some nice tax breaks too). Unfortunately, the fund manager has closed the fund. :D
...and he has asked me to not reveal his name or the fund.
:twisted:
Bob

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Re: Why would anyone buy hedge funds?

Post by jh » Fri Dec 16, 2011 10:54 pm

.....
Last edited by jh on Fri May 04, 2012 10:18 pm, edited 1 time in total.

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Re: Why would anyone buy hedge funds?

Post by Jerilynn » Fri Dec 16, 2011 11:12 pm

CABob wrote:
xerty24 wrote:Personally, I was heavily invested in a super hot hedge fund that returned 27.3% annualized over the last 5 years (net of all expenses and with some nice tax breaks too). Unfortunately, the fund manager has closed the fund. :D
...and he has asked me to not reveal his name or the fund.
:twisted:
Exactly! Otherwise the riff raff will be constantly hounding him to attempt to get in on this gravy train.
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)

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Re: Why would anyone buy hedge funds?

Post by grabiner » Fri Dec 16, 2011 11:14 pm

jh wrote:My Roth IRA is invested in the Vanguard Managed Payout Distribution Fund, which is kind of like a hedge fund. I like it.
The Managed Payout Distribution Fund is nothing like a hedge fund. It is an ordinary diversified mutual fund, holding a lot of different investment classes. (It does hold one unusual fund, the Market Neutral fund, which goes both long and short.) What distinguishes it from other funds is that it pays out a specified percentage of income automatically; if the income realized by the fund is less than the payout, the fund will sell assets in order to meet the payout, so you get some of your own money back.

In a Roth IRA, you could do exactly the same on your own (except for the Market Neutral Fund's $250K minimum), by holding the individual Vanguard funds, and then making additional sales if necessary to get the desired payout.
Wiki David Grabiner

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Re: Why would anyone buy hedge funds?

Post by jh » Fri Dec 16, 2011 11:34 pm

.....
Last edited by jh on Fri May 04, 2012 10:17 pm, edited 1 time in total.

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Re: Why would anyone buy hedge funds?

Post by Fallible » Sat Dec 17, 2011 12:27 am

People invest in hedge funds for all the reasons listed on this thread. Even more amazing, some who lose lots of money when their fund does poorly continue to put MORE MONEY IN thinking it will turn around and do well again. :roll:
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Re: Why would anyone buy hedge funds?

Post by LazyNihilist » Sat Dec 17, 2011 2:47 am

Fallible wrote:People invest in hedge funds for all the reasons listed on this thread. Even more amazing, some who lose lots of money when their fund does poorly continue to put MORE MONEY IN thinking it will turn around and do well again. :roll:
It's called Re-Balancing. Just like Bogleheads do :twisted:
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Re: Why would anyone buy hedge funds?

Post by lawman3966 » Sat Dec 17, 2011 3:43 am

Jerilynn wrote:I don't get it. The typical fees are 2 and 20 [2% of assets and 20% of profits]. For the ones brave enough to report their returns, on average, they lag the market. I can only imagine how lousy the ones are that don't report. They aren't as liquid as mutual funds.

Why would anyone get into a hedge fund?
The answers as to why a rich person without much investing knowledge would do so have been provided by many posters above.

However, I think an important point has been missed. For many hedge funds, the primary investors are institutional, especially including public employee unions. The pension fund managers have a mix of incentives for investing in hedge funds, some of which apply whether the fund does well or poorly.

If a hedge fund does well, the pension fund manager likely gets some sort of bonus, favorable career progress, and an excellent personal brand name. If the selected hedge fund performs poorly, the pension fund manager loses nothing, since it's not his money. He may suffer some short-term damage to his reputation. However, some big names in investing have done poorly for their pension funds, university endowments, yet have emerged damaged but still highly employable.

Most important is the "gratitude" the hedge fund owner owes the pension fund manager who has the discretionary power to select which of a plurality of hedge funds he will invest in. A decision that benefits a hedge fund may be paid back with future employment, or with "pay to play" arrangements in which the investment decision maker gets a "financial thank you" for selecting a particular fund. Steve Rattner - the point man for the GM bailout - paid a $10 million fine for getting involved in just such such a scheme. In general, no matter how badly a hedge fund performs, the 2% asset-based fee can be collected each year. Moreover, while the 20%-of-gain performance fees won't be collected in a bad year, the performance fees for previous years are obviously not refunded.

I have a relative who runs a rather large hedge fund. To my knowledge, the minimum investment amount is $ 20 million. Very few private investors have access to this level of investable assets. Thus, the vast majority of his clients are union pension funds which I suspect invest a minimum of $ 50 million each, and some considerably more. With four homes spread across the U.S. and a private jet to shuttle between them, the arrangement appears to be working quite well, for HIM. At one point, a writer on seekingalpha noted this exact fund had underperformed the S&P 500 index for seven years. Nevertheless, in that period, the hedge fund manager (and owner) went from being a generally rich guy to a super rich person, due to the increase in his asset base, and the general growth in the stock market. If the fund goes up 10% in a year, the performance fee will be 20% X 10% = 2%. Adding this 2% to the 2% asset fee yields 4% of all assets for the fund owners in a single year. Thus, hedge fund profits don't necessarily result from market-beating performance. Sometimes they result from very large asset pools enjoying average market returns.

The hedge fund business is a great one for the hedge fund owners. Whether it is for anyone else is inherently hard to determine as the returns can be difficult to track, and survivorship bias is significant.

Caveat Emptor.
Last edited by lawman3966 on Sat Dec 17, 2011 3:20 pm, edited 1 time in total.

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Re: Why would anyone buy hedge funds?

Post by grok87 » Sat Dec 17, 2011 8:19 am

lawman3966 wrote:
Jerilynn wrote:I don't get it. The typical fees are 2 and 20 [2% of assets and 20% of profits]. For the ones brave enough to report their returns, on average, they lag the market. I can only imagine how lousy the ones are that don't report. They aren't as liquid as mutual funds.

Why would anyone get into a hedge fund?
The answers as to why a rich person without much investing knowledge would do so have been provided by many posters above.

However, I think an important point has been missed. For many hedge funds, the primary investors are institutional, especially including public employee unions. The pension fund managers have a mix of incentives for investing in hedge funds, some of which apply whether the fund does well or poorly.

If a hedge fund does well, the pension fund manager likely gets some sort of bonus, favorable career progress, and an excellent personal brand name. If the selected hedge fund performs poorly, the pension fund manager loses nothing, since it's not his money. He may suffer some short-term damage to his reputation. However, some big names in investing have done poorly for their pension funds, university endowments, yet have emerged damaged but still highly employable.

Most important is the "gratitude" the hedge fund owner owes the pension fund manager who has the discretionary power to select which of a plurality of hedge funds he will invest in. A decision that benefits a hedge fund may be paid back with future employment, or with "pay to play" arrangements in which the investment decision maker gets a "financial than you" for selecting a particular fund. Steve Rattner - the point man for the GM bailout - paid a $10 million fine for getting involved in just such such a scheme. In general, no matter how badly a hedge fund performs, the 2% asset-based fee can be collected each year. Moreover, while the 20%-of-gain performance fees won't be collected in a bad year, the performance fees for previous years are obviously not refunded.

I have a relative who runs a rather large hedge fund. To my knowledge, the minimum investment amount is $ 20 million. Very few private investors have access to this level of investable assets. Thus, the vast majority of his clients are union pension funds which I suspect invest a minimum of $ 50 million each, and some considerably more. With four homes spread across the U.S. and a private jet to shuttle between them, the arrangement appears to be working quite well, for HIM. At one point, a writer on seekingalpha noted this exact fund had underperformed the S&P 500 index for seven years. Nevertheless, in that period, the hedge fund manager (and owner) went from being a generally rich guy to a super rich person, due to the increase in his asset base, and the general growth in the stock market. If the fund goes up 10% in a year, the performance fee will be 20% X 10% = 2%. Adding this 2% to the 2% asset fee yields 4% of all assets for the fund owners in a single year. Thus, hedge fund profits don't necessarily result from market-beating performance. Sometimes they result from very large asset pools enjoying average market returns.

The hedge fund business is a great one for the hedge fund owners. Whether it is for anyone else is inherently hard to determine as the returns can be difficult to track, and survivorship bias is significant.

Caveat Emptor.
Good post
:thumbsup
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Re: Why would anyone buy hedge funds?

Post by Jerilynn » Sat Dec 17, 2011 1:49 pm

lawman3966 wrote:
Jerilynn wrote:I don't get it. The typical fees are 2 and 20 [2% of assets and 20% of profits]. For the ones brave enough to report their returns, on average, they lag the market. I can only imagine how lousy the ones are that don't report. They aren't as liquid as mutual funds.

Why would anyone get into a hedge fund?
The answers as to why a rich person without much investing knowledge would do so have been provided by many posters above.

However, I think an important point has been missed. For many hedge funds, the primary investors are institutional, especially including public employee unions. The pension fund managers have a mix of incentives for investing in hedge funds, some of which apply whether the fund does well or poorly.

If a hedge fund does well, the pension fund manager likely gets some sort of bonus, favorable career progress, and an excellent personal brand name. If the selected hedge fund performs poorly, the pension fund manager loses nothing, since it's not his money. He may suffer some short-term damage to his reputation. However, some big names in investing have done poorly for their pension funds, university endowments, yet have emerged damaged but still highly employable.

Most important is the "gratitude" the hedge fund owner owes the pension fund manager who has the discretionary power to select which of a plurality of hedge funds he will invest in. A decision that benefits a hedge fund may be paid back with future employment, or with "pay to play" arrangements in which the investment decision maker gets a "financial than you" for selecting a particular fund. Steve Rattner - the point man for the GM bailout - paid a $10 million fine for getting involved in just such such a scheme. In general, no matter how badly a hedge fund performs, the 2% asset-based fee can be collected each year. Moreover, while the 20%-of-gain performance fees won't be collected in a bad year, the performance fees for previous years are obviously not refunded.

I have a relative who runs a rather large hedge fund. To my knowledge, the minimum investment amount is $ 20 million. Very few private investors have access to this level of investable assets. Thus, the vast majority of his clients are union pension funds which I suspect invest a minimum of $ 50 million each, and some considerably more. With four homes spread across the U.S. and a private jet to shuttle between them, the arrangement appears to be working quite well, for HIM. At one point, a writer on seekingalpha noted this exact fund had underperformed the S&P 500 index for seven years. Nevertheless, in that period, the hedge fund manager (and owner) went from being a generally rich guy to a super rich person, due to the increase in his asset base, and the general growth in the stock market. If the fund goes up 10% in a year, the performance fee will be 20% X 10% = 2%. Adding this 2% to the 2% asset fee yields 4% of all assets for the fund owners in a single year. Thus, hedge fund profits don't necessarily result from market-beating performance. Sometimes they result from very large asset pools enjoying average market returns.

The hedge fund business is a great one for the hedge fund owners. Whether it is for anyone else is inherently hard to determine as the returns can be difficult to track, and survivorship bias is significant.

Caveat Emptor.
If the pension fund manager continually picks loser hedge funds, can't he be sued for breach of his fiduciary duty? (Well, that's a dumb question, of course he can be sued). But, how often does it happen and when it does, how often is the pension fund manager found liable??
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)

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Re: Why would anyone buy hedge funds?

Post by Rrolack » Sat Dec 17, 2011 1:59 pm

Jerilynn wrote:
If the pension fund manager continually picks loser hedge funds, can't he be sued for breach of his fiduciary duty? (Well, that's a dumb question, of course he can be sued). But, how often does it happen and when it does, how often is the pension fund manager found liable??

My guess would be: pension managers are sued for picking bad funds about as often as portfolio managers are sued for underperforming the market. That is to say, never.

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Re: Why would anyone buy hedge funds?

Post by xerty24 » Sat Dec 17, 2011 2:01 pm

Jerilynn wrote:If the pension fund manager continually picks loser hedge funds, can't he be sued for breach of his fiduciary duty? (Well, that's a dumb question, of course he can be sued). But, how often does it happen and when it does, how often is the pension fund manager found liable??
Ha, the only way he gets sued is if he picked Madoff and should have known better. But even the SEC didn't figure him out after multiple investigations so I don't think even then there's clear evidence a reasonable person should have known better.
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Re: Why would anyone buy hedge funds?

Post by trico » Sat Dec 17, 2011 2:08 pm

I think I read that someone came out with a Hedge Fund Index ETF, where you can invest in over 250 large hedge funds within an ETF. I think George Bush invested in this. Don't quote me but I thing the minimum is like 50k.

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Re: Why would anyone buy hedge funds?

Post by Fallible » Sat Dec 17, 2011 2:22 pm

I've also wondered about the fate of institutional investors, especially pension funds, that invest in hedge funds and lose big, so I'm glad that was brought up on this thread. Meantime, here's a good backgrounder article on hedge funds maintaining their "mystique" despite huge losses for investors, including institutional:

http://dealbook.nytimes.com/2011/11/22/ ... -mystique/
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Re: Why would anyone buy hedge funds?

Post by Jerilynn » Sat Dec 17, 2011 2:56 pm

trico wrote:I think I read that someone came out with a Hedge Fund Index ETF, where you can invest in over 250 large hedge funds within an ETF. I think George Bush invested in this. Don't quote me but I thing the minimum is like 50k.
[political remark removed by Mod]
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Re: Why would anyone buy hedge funds?

Post by peter71 » Sat Dec 17, 2011 5:12 pm

Jerilynn wrote:
yobria wrote:
Jerilynn wrote:For the ones brave enough to report their returns, on average, they lag the market.
Can you site the source of this assertion? What market? Over what time period?

Nick

http://whitecoatinvestor.com/the-death- ... dge-funds/


The WSJ graph in that article seems to me to answer your original question in that it shows that, until recently, hedge funds significantly outperformed an ex-post style-optimized hypothetical fund.

Moreover, I'm not sure it's correct that the data that informs the graph is pre-fee. Hedge Fund Research will in any case give you data net of all fees.

https://www.hedgefundresearch.com/index ... 1324159212

In any case, this is how an efficient market is supposed to work. For a time HF's do appear to have succeeded in exploiting some inefficiencies, but over time those inefficiencies disappear.

Best,
Pete

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Re: Why would anyone buy hedge funds?

Post by AgnosticInvestor » Sat Dec 17, 2011 8:20 pm

lawman3966 wrote:
Jerilynn wrote:I don't get it. The typical fees are 2 and 20 [2% of assets and 20% of profits]. For the ones brave enough to report their returns, on average, they lag the market. I can only imagine how lousy the ones are that don't report. They aren't as liquid as mutual funds.

Why would anyone get into a hedge fund?
The answers as to why a rich person without much investing knowledge would do so have been provided by many posters above.

However, I think an important point has been missed. For many hedge funds, the primary investors are institutional, especially including public employee unions. The pension fund managers have a mix of incentives for investing in hedge funds, some of which apply whether the fund does well or poorly.

If a hedge fund does well, the pension fund manager likely gets some sort of bonus, favorable career progress, and an excellent personal brand name. If the selected hedge fund performs poorly, the pension fund manager loses nothing, since it's not his money. He may suffer some short-term damage to his reputation. However, some big names in investing have done poorly for their pension funds, university endowments, yet have emerged damaged but still highly employable.

Most important is the "gratitude" the hedge fund owner owes the pension fund manager who has the discretionary power to select which of a plurality of hedge funds he will invest in. A decision that benefits a hedge fund may be paid back with future employment, or with "pay to play" arrangements in which the investment decision maker gets a "financial thank you" for selecting a particular fund. Steve Rattner - the point man for the GM bailout - paid a $10 million fine for getting involved in just such such a scheme. In general, no matter how badly a hedge fund performs, the 2% asset-based fee can be collected each year. Moreover, while the 20%-of-gain performance fees won't be collected in a bad year, the performance fees for previous years are obviously not refunded.

I have a relative who runs a rather large hedge fund. To my knowledge, the minimum investment amount is $ 20 million. Very few private investors have access to this level of investable assets. Thus, the vast majority of his clients are union pension funds which I suspect invest a minimum of $ 50 million each, and some considerably more. With four homes spread across the U.S. and a private jet to shuttle between them, the arrangement appears to be working quite well, for HIM. At one point, a writer on seekingalpha noted this exact fund had underperformed the S&P 500 index for seven years. Nevertheless, in that period, the hedge fund manager (and owner) went from being a generally rich guy to a super rich person, due to the increase in his asset base, and the general growth in the stock market. If the fund goes up 10% in a year, the performance fee will be 20% X 10% = 2%. Adding this 2% to the 2% asset fee yields 4% of all assets for the fund owners in a single year. Thus, hedge fund profits don't necessarily result from market-beating performance. Sometimes they result from very large asset pools enjoying average market returns.

The hedge fund business is a great one for the hedge fund owners. Whether it is for anyone else is inherently hard to determine as the returns can be difficult to track, and survivorship bias is significant.

Caveat Emptor.
Nailed it. Thanks.

gerntz
Posts: 461
Joined: Fri May 06, 2011 3:37 pm

Re: Why would anyone buy hedge funds?

Post by gerntz » Sun Dec 18, 2011 7:28 pm

[quote="grok87"]

Investors generally become more conservative as they become richer. quote] This recent article suggest otherwise:

"the wealthiest have become the most crash-prone group in our economy."

"The new rich have become the high-betas of our economy. With their dependence on financial markets, their leverage and their hyperspending, the top 1% have income swings that now are more than twice as high as those of the rest of the population."

http://online.wsj.com/article/SB1000142 ... althy+beta

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momar
Posts: 1359
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Re: Why would anyone buy hedge funds?

Post by momar » Sun Dec 18, 2011 7:36 pm

gerntz wrote:
grok87 wrote:
Investors generally become more conservative as they become richer. quote] This recent article suggest otherwise:

"the wealthiest have become the most crash-prone group in our economy."

"The new rich have become the high-betas of our economy. With their dependence on financial markets, their leverage and their hyperspending, the top 1% have income swings that now are more than twice as high as those of the rest of the population."

http://online.wsj.com/article/SB1000142 ... althy+beta
Maybe it's just me, but if I was super duper rich I would have an extremely aggressive portfolio. With $100m or more, a loss of 50% means nothing and a loss of even 90% still leaves you wealthy.

If I instead had something more like $10m, I would be much more conservative. No reason to take risks which could cost you your financial independence.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep

NERD777
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Re: Why would anyone buy hedge funds?

Post by NERD777 » Sun Dec 18, 2011 8:25 pm

The few hedge funds that do beat the market consistently by employing HFT, various types or arbitrage (which can occasionaly blow up, i.e. LTCM), or trade on insider information, the general public and those without large amounts of capital would not and do not have access too. Solid hedge funds that employ sound, market beating strategies cannot perform these strategies with infinite capital and will almost always be closed to new investors. The market is not perfectly efficient, but efficient enough where these strategies cannot be performed ad infinitum.
momar wrote: Maybe it's just me, but if I was super duper rich I would have an extremely aggressive portfolio. With $100m or more, a loss of 50% means nothing and a loss of even 90% still leaves you wealthy.

If I instead had something more like $10m, I would be much more conservative. No reason to take risks which could cost you your financial independence.
If I were super duper rich I would not be overly aggressive. Assuming risk = reward (approximately) why take added risk when you are already financially sound for decades to come? I would personally want to be extremely diversified, fairly low beta, and as uncorrelated as possible, even at the expense of returns. If I had $100 million whats a few extra % get me? Another mansion, boat, bentley etc. Not worth it.

Caveat: I'm not super rich and my views may change if I were, but I doubt it.

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