Hedge Funds Are Hilarious

I think the performance of so-called hedge funds as a group wouldn’t be so roundly mocked and scrutinized if:

a) there weren’t so many of them and…

b) their compensation wasn’t so incredibly disconnected from what they’ve been able to deliver and…

c) they actually lived up to their nomenclature and actually hedged

But there are like 8000 of them and they charge more than double what traditional asset managers are able to and not only do they not hedge – it turns out that a great many hedge funds are really leveraged, highly concentrated vehicles that put on big positions and lever up to magnify them in the quest for a grand slam.  There’s nothing wrong with a fund’s portfolio being constructed that way if that is the manager’s strategy – but let’s please stop referring to that as “hedge funds” lest Alfred Winslow Jones continue rolling in his grave until he bores his way to China.

Here’s a stat you may not have seen in your post-holiday comings and goings, but it is one that should never be forgotten…

From FT Alphaville:

Many hedge funds are well below their high watermarks, meaning that they can only charge investors management fees, which at around two per cent is only enough cookie money for a year or two unless one is a ginormous fund. According to Credit Suisse data cited by the Economist, 67 per cent of hedge funds were below their watermarks at the end of 2011.

While returning cash in the face of adverse markets may be the noble thing to do, there is also the risk “that high-water marks could skew funds’ investing decisions. Managers who have not earned a performance fee in years could take bolder bets to get back into the black.”

Indeed, the FT pointed out in January (using the same Credit Suisse dataset) that leverage has crept up ever so slightly to 2.5 times, off the post-crisis low of 2.4.

To recap, years like 2011 are the exception not the rule – high volatility and a year of massive swings is an almost impossible climate for a traditional asset manager to navigate more than in a middling fashion.  Guys like me with clients planning for retirement are tasked with a mission of getting out alive and in one piece.  But hedge funds were supposed to have been able to thrive in a year like 2011.  That is how they typically present themselves and the exploitation of volatility along with non-correlated returns is the assumption for most hedge fund investors.

When looked at in this context, it is impossible to escape the conclusion that hedge funds as an asset class have just failed their final exam.

Here at TRB we root for everybody to find their way into successful investments and investment vehicles, no hating is the primary rule.  But I mean, come on!


Hedge funds exit stage left, pursued by bearishness (FT Alphaville)




This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. click here commented on Sep 14

    … [Trackback]

    […] Find More on on that Topic: thereformedbroker.com/2012/02/20/hedge-funds-are-hilarious/ […]

  2. sex commented on Sep 18

    … [Trackback]

    […] Here you will find 24698 more Information to that Topic: thereformedbroker.com/2012/02/20/hedge-funds-are-hilarious/ […]

  3. what is digital transformation commented on Nov 27

    … [Trackback]

    […] Read More on on that Topic: thereformedbroker.com/2012/02/20/hedge-funds-are-hilarious/ […]

  4. replica watch commented on Dec 17

    … [Trackback]

    […] Read More to that Topic: thereformedbroker.com/2012/02/20/hedge-funds-are-hilarious/ […]

  5. Harold Jahn Canada commented on Dec 19

    … [Trackback]

    […] Find More Information here to that Topic: thereformedbroker.com/2012/02/20/hedge-funds-are-hilarious/ […]

  6. ثبت شرکت commented on Dec 25

    … [Trackback]

    […] Info on that Topic: thereformedbroker.com/2012/02/20/hedge-funds-are-hilarious/ […]