4 ms·
When I first saw this post my initial reaction was... The data must be wrong, it doesn't make sense! I thought about it, and thought about it, then I realized
by wtvanhest 15y ago
When I first saw this post my initial reaction was...
The data must be wrong, it doesn't make sense!
I thought about it, and thought about it, then I realized it makes perfect sense.
Hedge funds as an asset class should net to zero. Meaning, there should be zero profits on average from Hedge Funds. Since hedge funds hedge, meaning they supposedly eliminate the effect of market movements, the aggregate of all of them should be zero.
Overtime, the bad managers loose their clients money and shutter and the good managers make billions.
Mutual funds should net to inflation.
Anything above zero for hedge funds and inflation for mutual funds represents alpha. (alpha is the additional return the manager returns).
It makes sense that if the industry is returning any profitability to their investors they should be paying a fee. If you pick the right hedge fund manager, you should make excellent returns. Picking the wrong manager results in you taking gigantic losses.
Even the best managers only make 20%+/- in addition to a carrying fee. But, the loosing managers suck the other profits out in carrying fees and losses.
I'm not sticking up for hedge fund managers, but I think it is important to note that it makes sense that 87% "of profits" go to managers after you take out the losses and lost fees on shuttered funds.
Winning funds still only take 20%ish of profits.
- xefer 15y agoThat's what the name "hedge" originally meant but for the most part they are pure investment vehicles now.
- wtvanhest 15y agoAll hedge funds are investment vehicles. All hedge funds hedge in someway. Many hedge funds hedge different types of risk. Most risk they hedge is market risk.
- pyoung 15y ago"Mutual funds should net to inflation." Are you forgetting to include economic growth in your analysis? Historical long term returns of the major indexes are in the 10% range (ballpark approx.), much higher than inflation, which I think was in the 2-3% range (also ballpark).
- wtvanhest 15y agoYou have to assume going forward there will be economic growth. It is a perfectly fair assumption, but not a fact. And, I will certainly not argue with that assumption. (although there are a lot of people that may) Hedge funds should still net to zero though. Which is much more important for this discussion. -I'd be interested in hearing what others think, maybe I'm off on my assumption that hedge funds should net to zero, or maybe I'm missing something else.
- JumpCrisscross 15y agoMarket participants should net to beta; hedge funds, as a subset of market participants, have no requirement to net to anything. Likewise for mutual funds.
- nandemo 15y agoBesides, "market return" is usually understood to be some equity index, while hedge funds can also invest in non-equity markets (currency, bonds, etc). Still, what wtvanhest is saying is relevant since in practice a lot of the hedge funds are trading against each other. So it's not "shocking" if their aggregate return is low. I haven't read the original articles but O'Reilly's post is very misleading.
- wtvanhest 15y agoHedge funds eliminate beta using the hedge. Whether they should meet market returns is a conversation institutional asset managers would have with their clients, but in practice, the aggregate of all of them should net to zero.
- JumpCrisscross 15y agoIn practice all of them should net to zero conditional upon them being perfectly beta hedged and having zero net alpha. This is very, very, very rarely the practical case. If you had moderated your comment with "in theory" instead of "in practice", then you would be more right (since they would then converge at the risk-free rate, not zero).