Why do people invest in equity hedge funds?
http://www.businessinsider.com/hedge-fund-sp-500-correlation-2013-2
Correlation between equity hedge funds is high...hedge funds also are largely underperforming the s&p. So why not just buy s&p?
edit: since this got bumped like a year later, i'll just say that i now think there's more nuance to this than I originally thought.
It's a way to signal to others that you're rich, like having a big house or driving a nice car. You can't brag to your friends at a cocktail party about investing in index funds, but you can brag about that genius hedge fund guy you invested with. The added bonus is that you can come across as a genius just for investing with the genius hedge fund manager.
Not sure why someone threw MS at you. While a cynical perspective and fairly pathetic, I have found this to be highly accurate (with the exception of your last sentence). Agree with Leverarb, by the time you can identify winners the fund is closed to new money although if you have the right relationships exceptions can be made. I think the best opportunities are with PMs who spin out of larger funds (i.e. Tiger Cubs) and have something to prove. Prolonged under-performance will inevitably lead to a shift in the HF model / fee structure.
All this chart shows me is that as more and more money has been contributed to equity hedge funds, they have become a larger part of the market, which obviously leads to a higher correlation. Oh, and the law of large numbers starts to kick in. What's the point here, that the strategy of equity funds has fundamentally changed to more correlated returns?
Why do people play the lottery? Same thing, with better odds of wining big with a hedge fund...
sure they're becoming a bigger part of the market but is that enough to explain all the increase in correlation?
also they are clearly not "the market" given that their returns are such shit compared to s&p
so ppl just try to "guess" which hedge fund will be the winner? might as well just bet on some random stocks.
The correlation is near-meaningless: the correlation between the S&P's returns and the S&P's returns + 10% is 1. But everyone will go for the S&P + 10%, of course, given the choice. In addition, even if hedge funds returns match the market, they still generate alpha if they have a beta lower than 1.
That said, as the equity hedge fund sector gets bigger, there is likely to be less alpha in aggregate, simply because hedge funds make up more of the market, and thus will have returns that look more like the market. But individual funds often still generate outsize returns unlikely to be due to chance, and rigorous asset allocators can often find them. A fair bit of the money, though, is put on bad bets.
uh yeah but they are not s&p + 10, they are s&p - 10% isn't the meaning of alpha good risk adjusted return? as an asset class with such low returns, are they really that "riskless" ?
Are you really using returns to judge risk? Further, apparently the lower the return, the riskier?? Would that make Treasury Bills incredibly risky?
uh did you misread? ppl are saying hedge funds with lower returns might be okay because they provide alpha.
if a hedge fund gives low returns, to have high alpha it must also have low risk. i was questioning whether hedge funds as an asset class are really "riskless" enough to justify their low returns.
Got it. FWIW, I don't think that was entirely clear in what you wrote. Also, the Sharpe should tell you if they are, indeed, riskless enough to justify the lower returns. That said, I wouldn't define average hedge fund returns as egregiously low either.
Let me know when the S&P cranks out 25%+ over 25 years
Or writes kick ass market commentary
Well Gray Fox I can definitely believe that equity hedge funds exist that legitimately provide alpha.
But what makes investors think that they can pick the right hedge fund when most of them don't?
This is so meta...
Actually, it is one of the key arguments in favor of index investing. While many of the more sophisticated analyses now suggest that some fund managers have skill in beating the market, it is very, very difficult to identify them in advance.
Just always buy the index. You can't ex ante identify top managers and ex post they are closed to new money. This problem applies to all fund managers not just equities.
Like with any other investment, it is driven by hope of big reward!
How does the "benchmark" S&P500 get it's value? If i bought 1 share of all 500 of its components, my port would be worth more than 1800.
also interested. please advice.
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