I'm five hedge fund types (arbitrarily chosen, and clearly not the entire population) into a data project on HF RORs, and I'm already struggling to understand how the HF industry still exists. Here's a screenshot of some of the numbers I'm looking at (please note that I understand these numbers may be off by a few percentage points here and there, but I think the numbers are not far from the truth, whatever that is).
Edit: Try and keep in mind the overarching theme here (no fund indices outperforming the market), not the specifics of my approach, unless that is so important it makes this whole post useless.
Sources: 1, 2, 3, ILF = iShares Latin America 40 ETF
I'm going to keep searching for niche HF types that are doing well, but this was just depressing to me. As I've been crunching the numbers, a lot of the active management arguments I'm familiar with have become much less convincing to me. The only one I can think of that still holds some weight is that HFs do much better in downturns, but that makes me wonder, if you were planning on putting your money in right as the trough in the economic cycle begins (assuming you have a crystal ball and know when the inflection point is), why would you not just withdraw from the market entirely? Although all of the HF indices I've looked at experienced much less negative ROR during the Great Recession, all of them still lost money as a whole. In the case of pension funds or insurance companies that need to make consistent payouts, why not just self-hedge (and maybe they partially do this, I don't know) by not investing two or three standard deviations worth of the expected payout amount, and then invest the rest in (insert index of choice here)? Seems like they would still beat HF returns in the long run.
Do all hedgies just think they can be the special snowflake that happens to kill it? Please help me understand how the HF industry still exists. I think there's no question with the amount of information asymmetry in the 90s that HFs were a novel and profitable idea, but nowadays it seems like it doesn't make sense anymore. I recognize there at least hundreds of billions under management in HFs, so obviously people know something I don't, and I want to learn whatever that is. I'm enamored by the the way Macro Bruin and others have described HFs as "a small, niche industry of the most talented minds in finance," and would love to believe that's true and that it's a profitable service and public good. Is it just like Macro Bruin says, that we need to significantly reduce the quantity of HFs, and the investment vehicle will be resurrected? I want to keep the dream alive! Thanks to any and all responses.
[Disclaimer: I understand I'm a naive student, and I know this gets discussed a lot on here, but looking at the actual numbers brought up some new questions for me.]