Thursday, June 17, 2010

Remind me...why I am paying 2 and 20?

My very first post on this blog was to question what exactly are hedge funds hedging? My principal objection was that hedge funds were one giant risk trade and aggregate hedge fund returns were correlated with stock returns. Now nearly three years later, nothing has changed. The latest figures from HFRX show their global hedge fund index to be slightly down for the year after suffering a horrible May, just like equities:

What's more, Byron Wien recently spoke out to say that he believes that the hedge fund industry may have to engage in more risk control, which will serve to depress returns (and volatility). This is a clear indication of over-capacity in the hedge fund industry, of too many players chasing too little alpha.

Remind me again, why are investors paying the big 2 and 20 fees for these equity-like returns?


rwburcik said...

What astute savvy investor would hire a money manager who takes 1/5 of any gains that also shoulders none of any declines? It is great work if you can find it. Only a fool would retain a partner on terms like these!

stocksystm said...

Investors pay it because they believe the snake oil hype being foisted upon them in the media. Hedge funds market themselves as a special club where those with influence place their bets. However, hedge funds show the same persistence of returns as mutual funds, which happens to be none.