The Infographic That Ate WallStreet

I'll just say that the purpose of a hedge fund isn't to beat the overall market. You want someone who can make you money in the good times, and not lose money in the bad (pretty sure that's what 'hedge' means). That's why it costs a bit more to protect your fortune, rather than putting it all on black and hoping nothing bad happens.

I don't have the kind of cash for a hedge fund, but I'm also not buying SPX or any other ETF/Mutual fund, because the benefit just isn't there right now. My advice would be if you have the time and knowledge of the financial markets (90% of people on here should), you should be buying individual companies through an online retail broker.

Last time I checked no one is holding a gun to LP's heads' when they allocate to HF/PE/VC and the Institutions/UHNW individuals that are writing $20-$500mm tickets are able to fend on their own.

As central banks work to mitigate downside risk, the 2 and 20 hedge fund business model becomes less appealing...courtesy of Zero Hedge.

http://www.zerohedge.com/news/2013-01-05/88-hedge-funds-65-mutual-funds…

So many of you guys on here are kool-aid guzzlers. The info graphic is pretty compelling, but you don't want to hear it because you think it destroys your reason for existence. I say, fuck that. Embrace your inner hypocrite, be a hedge fund manager, collect your fees, and hope for the best. If you outperform, collect those incentive fees and laugh at the little peons. If you have positive performance at all, still collect your incentive fees and sleep on your bed of $100 bills. You literally can't lose. Just keep your personal money in index funds.

Taken straight from Quora:

http://qr.ae/ND42e

Quora User:

I'm obviously biased, but I'm going to say no, hedge funds are not for suckers. If anything, they're for extremely intelligent and savvy investors who want a different risk-return profile. It's easy to make the claim that on average, hedge funds generate very little alpha. Fine, I'll give you that. But on average, stocks also generate zero alpha. On average, bonds generate zero alpha. On average, commodities generate zero alpha. But the point is you'd never invest in the universe of all hedge fund managers. And you wouldn't want to, because that's a sucker's bet. Unlike stocks, you don't want to invest in the hedge fund index. The point is that as a hedge fund investor, you want to be intelligent about manager selection and picking the right guy to manage your money. If you agree with the statement that it is a worthwhile goal to pick stocks that you want to outperform, then you'd agree that it is also a worthwhile goal to pick hedge funds that you want to generate alpha. You don't care about the universe, you care about YOUR investment in the outperformer. And there is no doubt that there are hedge funds and managers out there that generate alpha year after year, just like how there are great companies that outperform the index year after year. You just have to pick the right ones to invest in. That's not a trivial problem. That's not easy. In fact, that is very hard. But you know what else is hard? Picking the right stock to buy or picking the right bonds to buy. That's why you're paying hedge funds 2 and 20. The following research sums up the value-add of hedge funds in a nutshell: Hedge funds and S&P500 have nearly identical 20-year performance (http://soberlook.com/2013/08/hedge-funds-and-s-have-nearly-identical.ht…); but very different on a risk-adjusted basis Basically overall returns are about the same, but risk-adjusted returns are much better for hedge funds due to: 1.) Lower Beta and 2.) Lower drawdowns. Both of which are worthwhile reasons for being invested in hedge funds in the first place.

I'm by no means an expert, but since hedge funds encompass a wide range of asset classes, it isn't really fair to compare it to the S&P.

This has always been the case. There have also always been money managers near the top of the U.S' wealth distribution whose investors did a whole lot better than the S&P 500 over longer than 10 years.

The whole point is that there are managers out there who will do a whole lot better than the 'average' manager.

I remember that when i called out FSLR in some thread a guy with HF badge told me that if i invest in solar stocks i do not care about fundamentals, well... that explains a lot.

It depends on a fund's correlation to your other assets, such as the stock market. That's the premise of MPT, which is a debatable theory but intuitively has some appeal.

For example, suppose there are two securities X and Y with the same expected return and variance that have independent returns. If you put 50 dollars into X and 50 dollars into Y then you get the same expected return as 100 dollars into X, with half of the variance.

It follows that you could put 50*sqrt(2) in each of X and Y, to get the same variance as a portfolio with just X yet with a greater expected return.

Obviously this is a very idealized and unrealistic example, and variance is not necessarily a good proxy for "risk" . Moreover, it's not like you know the "correlation" or that the "correlation" is even fixed. However, I wouldn't immediately dismiss funds just because their absolute performance is lower than the s&p.

Right. If we are going to hand pick random starting point and end point, why not try "An investment of $1000 in Jan 2000 is worth X in March 2009"?

Comparing headline returns is idiotic without accounting for volatility and drawdowns.

"The S&P on average has outperformed average hedge fund returns in 9 out of 10 years" in a bull market is so ridiculously pointless. The S&P has outperformed average hedge fund returns in 12 out of 13 years since 2000, but on a cumulative basis returned about 1% annualized since, while hedge fund returned on average 4% annualized net of fees, because returns actually compound.

When you have a 60% peak-to-trough, you need to triple your money to get back to where you were. Effectively this is what S&P did since 2008, down from 1500 to 680, now at 1700, for a paltry low single digit annualized return. Go pick any HFR index and none has performed so pathetically, even thought S&P would have beaten any HFR index 4 out of the 5 years since.

but why let facts get in the way of a popular opinion?

returns without vol measures (ie sharpe ratio) don't mean much...

Classic "USA Today" charts. As a life lesson (especially for folks contemplating careers in a truth seeking business, e.g. investing, science, crime fighting, etc), always question the source, validity, and presentation of data. Bearcats identified a few of many issues with this infographic.