The Beta Band (or why do we call them hedge funds, anyway?)

Beta (market performance) is free.  It’s Alpha (performance above market returns) that oughta cost ya.  Apparently, this is news to many hedge fund investors.

The average hedge fund is little more than the highest cost provider of market access.  Anywhere from 2 to 10 times more expensive than an asset manager or an ETF wrap program, less transparent, less liquid and less responsible on a fiduciary basis.

Sounds great, where do I sign up?

And why are we still calling them “hedge funds” anyway?  Have a gander at this Onion-worthy headline from the New York Times from last week:

Hedge Funds Rescued From Down Year By Market Rally

Are you serious?  Um, yes, they are apparently…

A stock market rally has helped hedge funds avoid a nightmare prospect of another year of losses, but their performance raises questions about just how much value managers add through their own skills…the correlation between hedge fund returns and the S&P 500 index over the past 12 months is close to historical highs at 0.94, where 1 indicates perfect correlation, while the correlation of equity hedge funds is 0.96.

Hedge funds on average are in-line with the major indexes this year, despite several massive drops this spring and summer that should have been opportunities for them to pull ahead.  They didn’t.  As an asset class, the sexiness is at an all-time low.

Could you imagine paying 2% management fees to Vanguard for an S&P 500 ETF and then giving them 20% of whatever it gained on the year?  Crazy?  Well this is precisely what some of the most affluent, sophisticated investors in the country are about to do – market performance or worse at a 10x fee.

As with all professions, there are the Great, the Good and then a whole lot of Whatever.  In the hedge fund industry, the Whatevers are charging an arm (2% of assets) and a leg (20% of profits) for market performance.

I’m not saying hedge funds are all bad, I’m saying that most of them have no reason to exist.

Source:

Hedge Funds Rescued from Down Year by Market Rally (NYT)