The point of this Blog is not just to debunk hedge funds or rail against their managers who have largely engorged and enriched themselves at the expense of their investors (I’ll do this anyway) but to emphasize a point I make in my forthcoming book, lots of private investors (the you and the me’s of the world) can largely achieve better results than the average hedge fund without paying excessive fees, being locked into illiquid investments and being enthral to puffed up financial robber barons.
One reason a private investor can improve on average or industry wide returns is that the term, Hedge Fund, is a term of art. It has no legal or regulatory meaning in itself. There are literally tens of thousands of so-called hedge funds around the world.
The vast majority of these entities have adopted the term hedge fund for marketing and status reasons and the use of the term in no way implies anything special about the strategies or techniques used by the fund manager. As a matter of fact a lot of these funds don’t even “hedge” any of their positions and many are just long-only funds resembling in approach the “central tendency” of the mutual fund / unit trust industry to which they’re supposed to be an alternative.
Are there are uniquely talented hedgies? Yes, there genuinely are. There are the John Paul Tudors, John Paulsons, Chris Hohns and a handful of others. Uniquely talented managers are not to be confused with simply the highest earning managers – high management earnings are not synonymous with high performance for their investors. They are synonymous with fund size and the gall of the managers’ fee charging scheme and the commissions he’s prepared to pay to entities that gather and channel investable money.
Research by a trio of US academics (Clifford, Aiken and Ellis) analyzed the returns of thousands of hedge funds that are SEC registered and hence presumably report performance reasonably honestly.
To read the whole article, goto:
Walter is the author of the forthcoming book Thematic Investing (Searching Finance 2013)