Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
8 posts • Page 1 of 1
How accurate are public estimates of hedge funds' annualized returns? Recent reports gave wide ranges for the annualized returns of Citadel since the fund's inception. As hedge funds do not typically release their results, how reliable are the composite figures generated by analysis firms like Hedge Fund Research?
They are very unreliable. A lot is self reported and the hundreds of funds that close down each year create survivor bias. Also hedge funds have such differing strategies that even if you had the average you wouldn’t know much.
What you and the other respondents say is in line with all of the research I have found on this topic. Why then, with hedge funds' historically poor performance and their record of producing absolute return only for the fund managers themselves through guaranteed management fees, would pension funds for corporations, government workers, and labor unions ever allocate anymore than a tiny percentage of their assets to hedge funds?
One of the pressing questions on my mind is whether the employees contributing to these pension funds truly have a good understanding of what a portion of their money is being siphoned into? Are there standardized methods in place to ensure that pension fund participants are given regular updates of where their money is going to be invested?
One recent news story which rekindled this question in my mind was featured in the New York Times:
https://www.nytimes.com/2017/10/22/nyre ... .html?_r=0
In this case, the defendant was accused of putting $20 million of the pension fund into a high-risk hedge fund. Were members of the union given notice of this new investment before it was made?
I think there are lots of reasons some of which are good and some bad. There are a very few funds that outperform. Renaissance is in that category. There are also strategies that certain hedge funds employ that work: trend following, managed futures, etc. In a bull market for the S&P these tend to underperform. Many hedge funds are supposed to be low beta so they should underperform when the S&P is going up consistently. Pensions buy in to reduce equity risk. My feeling is that there are many "hedge fund" like strategies that are valid. Larry Swedroe himself recommends several of them but many of the funds are overpriced and don't actually do what they say very well. Now with AQR, Alpha Architect, and others entering the market with cheaper and more transparent offerings there's good reason to look at these strategies. It's good to allocate some across the board to diversify but seek out the cheapest and most transparent options. Wait until there is another down turn and all of the sudden managed futures will be back.
There is a customer base of underfunded pensions that are happy to pay a liar that claims to be a "professional" to make bold estimates that suggest their under-funding of their pension liabilities is justified.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham