Friday, January 4, 2013

Hedge Fund Managers Get Wealthy – Hedge Fund Investors Do Not

Another Example of How Easy It is To Fool the Rich

Wealthy people believe that they are entitled to more opportunities than the rest of us, including the opportunity to invest in hedge funds, where investments are limited to those very high net worth individuals who can afford the risk.  The reaction here, great, they are welcome to invest in hedge funds as much as they want, and the rest of us will pass.

Why the lack of outrage at investors who have access to the great minds that manage hedge funds?  Well it turns out the hedge funds have not done very well over the past decade.

WHEN it comes to brainboxes, the name “Nobel” has a certain ring. But news that the Nobel Foundation plans to increase its investment in hedge funds, because years of low returns forced it to cut cash prizes in 2012, is one to leave laureates scratching their eggheads. The past year has been another mediocre one for hedge funds. The HFRX, a widely used measure of industry returns, is up by just 3%, compared with an 18% rise in the S&P 500 share index. Although it might be possible to shrug off one year’s underperformance, the hedgies’ problems run much deeper.

When evaluating investment performance one benchmark is how a portfolio did against a broad based index, like the S&P 500.  In the case of hedge funds, not so good.

The S&P 500 has now outperformed its hedge-fund rival for ten straight years, with the exception of 2008 when both fell sharply. A simple-minded investment portfolio—60% of it in shares and the rest in sovereign bonds—has delivered returns of more than 90% over the past decade, compared with a meagre 17% after fees for hedge funds (see chart). As a group, the supposed sorcerers of the financial world have returned less than inflation.

And have the managers of the hedge funds been punished by the market place?  Not really.

Gallingly, the profits passed on to their investors are almost certainly lower than the fees creamed off by the managers themselves.

Robin Hood, it is said, stole from the rich.  The rationale being how much money can you make stealing from the poor.  But another rationale is just as important, taking the wealthy for a financial ride  is just so easy.

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