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February 18, 2009


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The ol' "Lake Woebegone" syndrome, so-to-speak, can't be ignored either, but I think that's probably either a sub- or super-set of your above points.

Kid Dynamite

ah yes... but if there's anything we should have learned over the last 18 months it's that the hedge fund boys generate a lot less alpha than we thought...

and i certainly wouldn't support a hedge fund (performance based) comp model for mutual funds.


I think most hedge funds exhibit the inverse of these traits, but do so collectively. They are nimble, yes, but mostly in all piling into the same "arbitrage" opportunities (look at the VW short-squeeze). Their incentives may be better aligned with seeking upside, but they aren't as well aligned in protecting against downside. Hedge funds (I know, big generalizatin about to follow) often seek out complex situations that even they might not fully comprehend (CDO B-notes).

I think I remember seeing a stat once that suggested hedge funds are rarely more successful than their first 2 years. Part of it had to do with the rapid growth in AUM that typically followed a successful launch, but I think it also was due to the crowding out by other hedge followers into a previously successful strategy/trade.

That said, I think there is a real need for hedge funds - but maybe more along the lines of the private family vehicles or the Buffet 60's model. Longer-term focus, no real constrictions on strategy beyond risk tolerance, and a healthy sense of perspective.


MarketSci makes a silly and unfair comparison. He is comparing his ONE firm with mutual fund managers as a whole. Any educated investment professional would tell you that, on balance, about half of active managers will outperform their respective benchmark over a given period. The universe of active managers is likely representative of the entire market, which by definition must have an outperformance of 0%.

There are many portfolio managers in the mutual fund space that have proven they are able to outperform over very long time frames. Any one of them could have written the exact same thing. MarketSci is nothing special.

Joshua Brown

great piece anal_yst

i wonder, though, will people trade the "possible" returns of edgy hedge funds for the transparency of mutual funds or etfs, even if they are at a natural disadvantage due to the factors you've pointed out?

with each new scam in the alt inv world or hedge/ money manager world, don't you think people, even HNW people, will be driven back to the comfort of the Vanguards they know and trust, regardless of the performance?

plain vanilla may suit the national mood in light of all the trouble that rum raisin and pistachio have caused with the redemption gating and fraudulent statements



@ Josh

"1-2" actually wrote this one, but I'll pass it on, thanks!

Bulging Bracket

@ Josh - The people who shouldn't be in hedge funds will be scared back to more vanilla products. There will be a cull of HFs. Leaves room for people who know what they're doing (managers and clients both).

One of the better things for private clients is that institutions will face severe pressure to get out of alternative asset classes. The idiots in the Ivy Alum associations (and on faculty) are doing a very good job of killing their endowments abilities to ever have decent returns in the future, but it means ideas will last longer and individuals will have access to better managers in more accessible sizes (all relative, of course). That it's going to positively screw all sorts of Liberals is just bonus!


HF better returns? Ha!

I can't count on my fingers and toes how many of my buds are shutting down right now b/c they have no hope of getting back to their HWM.

MFs don't do well because investors don't want them too. I.E. - anything that can be called a derivative is a no go, no matter how vanilla. Demand from the big money is squarely in the camp of don't go to far away from the benchmark or we'll cut you off. Where's the incentive to outperform? Closet benchmarking sells.

Air Jordans

So funny, I think.*

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