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If the benefits of passive investment strategies are so obvious and widely known, why do wealthy investors turn to hedge funds? I find the argument that they ju

by et2o 11y ago

If the benefits of passive investment strategies are so obvious and widely known, why do wealthy investors turn to hedge funds? I find the argument that they just don't know better to be unsatisfactory.

help_everyone 11y ago
Sales.
- et2o 11y ago
  You mean they are simply being sold to so well they don't conduct their own research? That also seems like an unsatisfactory explanation.
  - 1971genocide 11y ago
    Its hard for me be believe that people with a lot of money whose only job in life is to figure out how not to lose it do not do their research. There has to be deeper reason.
    - derriz 11y ago
      I've pondered this too. I have a friend who is a successful business person and know some others - none in the finance industry. These are just observations from a tiny sample size. First I am surprised that none understand the finance industry; understandable since they were too buzy building a business to worry about anything but cashflow. More importantly is that I think they all suffer from a cogitative bias - they all ignore survivorship bias and believe they can beat the "system" which makes them susceptible to slick finance sales pitches. That sounds a bit cruel - i don't mean it to be; the same attitude got them to where they are.
  - help_everyone 11y ago
    I would say so. My understanding is most of finance is more about who you know than anything else. This understanding comes from my work in the legal industry and having high-powered and incredibly wealthy clients. The product we were selling (legal services) wasn't any better than what was down the street but because of personal connections we got the business and it seemed that way for most of the deals that revolved around their (wealthy people's) decisions. I specifically dealt with legalities of financial matters of the very wealthy. edit... I'd like to add that the majority of my clients didn't have the time or the willingness to do their own research on the vast majority of their personal finances. Instead they would use people they trust at specific institutions and give little thought after that.
  - bybjorn 11y ago
    Yes. Cheaper index-funds are often the better choice, but banks aren't selling those as agressively.
  - exelius 11y ago
    No; the institutional investors (pensions, endowments, trusts, etc) who are largely the ones buying these hedge funds are just as much a part of the game as the hedge funds themselves.
rockinghigh 11y ago
High net worth clients only allocate a small percentage of their portfolio (5-20%) to hedge funds with high fees. The rest is invested in mutual funds and ETFs with low fees (<1%).
deleted 11y ago
[deleted]
bko 11y ago
My impression is that they want to invest in these exclusive vehicles precisely because they're exclusive. Also, these are human beings not homo-economicus or even necessarily financially savvy people. Very successful people also tend to have over-confidence. Sure, most hedge-funds under-perform the market, but some perform very well, and I know how to pick those.

by et2o 11y ago

help_everyone 11y ago

Sales.

et2o 11y ago
You mean they are simply being sold to so well they don't conduct their own research? That also seems like an unsatisfactory explanation.
- 1971genocide 11y ago
  Its hard for me be believe that people with a lot of money whose only job in life is to figure out how not to lose it do not do their research. There has to be deeper reason.
  - derriz 11y ago
    I've pondered this too. I have a friend who is a successful business person and know some others - none in the finance industry. These are just observations from a tiny sample size. First I am surprised that none understand the finance industry; understandable since they were too buzy building a business to worry about anything but cashflow. More importantly is that I think they all suffer from a cogitative bias - they all ignore survivorship bias and believe they can beat the "system" which makes them susceptible to slick finance sales pitches. That sounds a bit cruel - i don't mean it to be; the same attitude got them to where they are.
- help_everyone 11y ago
  I would say so. My understanding is most of finance is more about who you know than anything else. This understanding comes from my work in the legal industry and having high-powered and incredibly wealthy clients. The product we were selling (legal services) wasn't any better than what was down the street but because of personal connections we got the business and it seemed that way for most of the deals that revolved around their (wealthy people's) decisions. I specifically dealt with legalities of financial matters of the very wealthy. edit... I'd like to add that the majority of my clients didn't have the time or the willingness to do their own research on the vast majority of their personal finances. Instead they would use people they trust at specific institutions and give little thought after that.
- bybjorn 11y ago
  Yes. Cheaper index-funds are often the better choice, but banks aren't selling those as agressively.
- exelius 11y ago
  No; the institutional investors (pensions, endowments, trusts, etc) who are largely the ones buying these hedge funds are just as much a part of the game as the hedge funds themselves.

rockinghigh 11y ago

High net worth clients only allocate a small percentage of their portfolio (5-20%) to hedge funds with high fees. The rest is invested in mutual funds and ETFs with low fees (<1%).

deleted 11y ago

[deleted]

bko 11y ago

My impression is that they want to invest in these exclusive vehicles precisely because they're exclusive. Also, these are human beings not homo-economicus or even necessarily financially savvy people. Very successful people also tend to have over-confidence. Sure, most hedge-funds under-perform the market, but some perform very well, and I know how to pick those.