I was just talking to my friends a few days ago. He used to work at a hedge fund that was shut down recently due to poor performance.
He told me 80% of hedge funds don’t beat indices, and felt like value of hedge funds lie in CREATING JOBS for hedge fund managers / analysts, sell-side analysts and bank employees that serve hedge funds, as well as LPs that invest in hedge funds.
Is the statistics right? Can hedge funds even beat indices? Is absolute return really absolute?
"value of hedge funds lie in CREATING JOBS for hedge fund managers / analysts, sell-side analysts and bank employees that serve hedge funds, as well as LPs that invest in hedge funds."
What else do you expect from a hedge fund ? ending world hunger ?
Sorry I meant create jobs for people at LPs, for example people who are hired to select the right hedge funds to invest in.
My friend’s point being most HFs dont really outperform the markets so value lies not in generating returns but in creating jobs along the supply chain
He is obviously very cynical
What do you think the purpose of hedge funds are? Are they making world a better place?
Same question over and over, it starts to be annoying.
No matter if it is true or not, hedge funds aim is not to beat the S&P.
I have never seen people complain that real estate underperform S&P, yet everyone consider real estate as a good investment.
Now do hedge fund underperform ? No definitive answers as hedge fund are not very transparent about their performance but :
S&P was flat between almost 10y from 2000 to 2011/2012, don't u think HF dis better on this period? We just had a crazy bull decade. No certainty that it will continue.
S&P sharpe ratio is 0.37 since 1997 (creation of the S&P mini futures), I am sure a lot of hedge funds or mutual funds have better Sharpe ratios
Agreed, just to piggy back on what he said. It’s not about returns. It’s about risk-adjusted returns. You want to be uncorrelated to the market (S&P). It’s a different ball game.
This job is really effing hard. That is all.
Hedge funds always say they're not trying to beat the S&P and they're trying to create "uncorrelated returns" or "lower risk returns" or whatever. But if they can't at least *match* (let alone beat) a tax-efficient buy-n-hold strategy over a 10-20 year period, then the argument doesn't feel very satisfying. Besides, how do I know your fund really is uncorrelated or lower risk? I used to work at Citadel and we always said we were uncorrelated, but in 2008 the S&P went down but we went down even more (and very nearly went bankrupt).
The "risk-adjusted returns" argument is kindof a cop-out cause it's hard to disprove. If it were possible to beat the market, hedge funds absolutely would be trying to do that instead (all the legendary funds from the 80s, 90s and 2000s did have beating the market as their explict goal. The risk-adjusted-returns argument only came later after the industry got much more crowded). Also, hedge funds do add a lot of risk of a different kind -- we've seen many "safe" hedge funds suddenly blow up due to fraud or bad risk management or liquidity crunches that would never happen if you just put your money in an index fund.
That said, though, I have spent my career working at top-tier funds, so yes, they did create a job for me, at least. :-)
I think you are confusing things, on any one year or shorter period (few years), hedge funds are not trying to beat the S&P. Over time, having better risk adjusted returns generally means you will beat the market (at that point it is just about having vol, which can be a small or big deal thing). If you can scale your strategy/firm, and you target OVER TIME returns that are as high or higher than the S&P (which many funds do). Too many people point to any one year (S&P up 30% and a fund up 10%, etc).
That being said, there are many funds that don’t and can’t do that. It is VERY hard to do and you get many people that don’t manage money properly (or think they are but haven’t really experienced inflation, or equity drawdowns, etc and aren’t prepared for it). So the winners continue collecting AUM and many funds get blown out.
To your citadel thing, yeah they screwed up, revamped and as you can see are much better positioned today.
Sure, agree with all you said in principle. My point is just that once you admit "many funds don't and can't" match long-term returns of buy-n-hold, and if you also admit that even top-tier names like Citadel really wasn't uncorrelated or lower-risk at exactly the moment you needed those things, then you have to wonder if the hedge fund you're investing in today has the same problem.
If you can invest into Ren Tech or PDT, then sure, they seem to have a winning formula. But those are closed to new money. All the funds that you can actually invest in have underperformed the S&P over the 5, 10, and 20 year horizons. And sure, the past 20 years have been a bull market, so "lower risk returns" is expected to underperform during bull markets. But if they're telling you to accept a lower 20 year return in exchange for "lower risk" then the obvious question is "Can you prove you're lower risk? Here's a list of top-tier funds that said that and they blew up or did much worse than the S&P in bad years, so how do I know your fund is actually uncorrelated or lower risk?"
I currently work at a legendary top-tier fund, and I've seen our risk models and they *say* we're lower risk, but even I'm not 100% sure.
Why would anyone ever buy a bond that yields lower than 7% since they’re unlikely to beat the market? Have you ever considered, maybe, the allocators aren’t complete clueless idiots getting scammed and instead have a certain return profile? For example, an endowment might spend 5% a year on ops/scholarships - they aim to grow the endowment but it’s more important they don’t have 20% down year ever.
Thought exercise would you rather have a guaranteed 6% annual return or a hedge fund that beats the s&p 6% a year with 1.5x s&p volatility? If you’re an endowment you want the former and you can lever that 6% and you’re not paying fees for beta. This is why the Millennium for example is turning down capital despite modest absolute returns through the bull market - they’re just delivering a very steady stream of only the alpha portion and not charging for beta. If you care more about gross return without consideration of risk, you STILL would rather just lever up the product providing steady alpha where you can be somewhat more comfortable you don’t have a meltdown when market turns. Believe it or not, most institutional LPs are not looking to yolo long tech equities with their entire endowment.
People get so confident with this line of thinking that completely betrays a total lack of understanding of what the PROPOSED value prop is and are always so sure institutional LPs know nothing. I’d say if this is an area of interest, you should do some reading until you understand the why it’s a silly question, but you’ll probably just assume this is defensiveness from an offended guy whose in on the big secret scheme - so carry on
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