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Weekend reading: Hedge funds find it hard to be different nowadays

Weekend reading

Good reads from around the Web.

Back in the days before Monevator, I used to argue on forums with ‘sophisticated’ investors who told me I was just jealous when I doubted the case for hedge funds.

Nowadays everyone and his dog knows most hedge funds don’t deliver returns to justify their fees or their fanfare.

Worse, their supposed hedging was revealed as an expensive chimera during the 2008 downturn, too.

Some big pension funds are pulling money from hedge funds, and not before time. Sky-high hedge fund fees have taken an estimated 84% of net real investors’ net profits since 1998!

Yet assets under management at hedge funds are still rising.

I am sure this is because rich people like to feel special, rather than because they’re smart.

Cor! Look at the correlation on that

During my debates of yesteryear, I was invariably told that as well as not understanding that hedge funds shouldn’t be compared to the market (as if losing 5% less in a downturn made up for years of lagging the market and massive fee engorgement) I also didn’t realize how valuable non-correlation was.

That was true. One’s appreciation of asset correlations is like fine wine – it gets better with age.

I now think if hedge funds as a class truly delivered uncorrelated returns, they might be worth the money.

But they barely do, as these graphs plucked from the latest Absolute Return Letter indicate:

(Click to enlarge)

(Click to enlarge)

The graphs show how various popular hedge fund strategies have becoming increasingly correlated with the returns from a portfolio of global equities.

Why pay 2/20% in fees if you can get roughly the same performance from cheap global equities and a bond ETF?

You can fool some people all of the time

Hedge funds once romped about in a world without much competition, and that is reflected in the left-hand side of the graphs.

Those were the good old days. Sophisticated investors really had stumbled onto something different.

However the very popularity of hedge funds – they now manage nearly $3 trillion in assets – has doomed them to mediocrity.

When you are the market, you can’t beat it, especially after stratospheric fees.

Even keeping anywhere near the market is now a high hurdle for hedge funds.

According to Bloomberg:

Hedge funds, on average, have returned just 2 percent in 2014, their worst performance since 2011, according to data compiled by Bloomberg.

The article also says 2014 will be a bumper year for hedge fund closures.

Perhaps it will – but then again I’m sure 2015 will be a bumper year for hedge fund openings.

The story is better than the reality.

But people buy stories.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

  • It’s hard to hold a 10,000% winner – Value Perspective
  • A crowd-valuation of Uber… – Musings on Markets
  • …at around $40 billion Uber is too big to ignore – Abnormal Returns
  • Reviewing – and selling – Imperial Tobacco – UK Value Investor
  • A good company versus a great company – Clear Eyes Investing
  • Dewhurst: An undervalued microcap – Beddard/iii
  • A long look at short-termism [Paper]Michael Mauboussin
  • “In addition, you have enjoyed considerable non-pecuniary compensation such as perfumed sedan driver(s) and assorted assistants who spray ionized lavender water on your barren cranium.”  – An activist investor [SEC filing] on the trail of Jim Cramer’s Street.com [More at Dealbook]

Other articles

Oil price turmoil mini special

  • The maths behind $80 oil – The Fat Pitch
  • Lessons from the oil rout – MoneyBeat
  • Sheiks versus shale: The economics of oil – Economist
  • What if big oil has to leave its assets underground? – Bloomberg

Product of the week: Wondering where to buy your Christmas tree – and whether to plump for fake fir? The Guardian rounds up your options.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • Investing wisdom from three experts – Vanguard [featuring Mike]
  • Holding winning funds as hard as finding them – Research Affiliates
  • Even big universities can’t really beat the market – Swedroe/ETF.com
  • Nutmeg: A tech take on wealth management [Search result]FT

Active investing

  • Caution urged over property funds [Search result]FT
  • Multinationals and the new politics of hate [Search result]FT
  • Have risk and return been upended? [On low volatility]Bloomberg
  • What the ultimate (US) stockpickers are buying – MorningStar
  • Emerging markets prospering: Jim O’Neil – Bloomberg
  • The case for AIM-listed Redcentric – Jim Slater / Telegraph
  • The impact of activist investors – Fortune

Other stuff worth reading

  • Could Islington’s “buy-to-leavers” be sent to jail? – Guardian
  • A Q&A with UK Pensions Minister Steve Webb – Telegraph
  • Investing in film posters – Telegraph
  • How boy bands go bust – Telegraph
  • The shortlist for the financial chart of the year – Quartz
  • Gold bugs keep changing their tune – Bloomberg View
  • Young couple excited about buying first property… – Daily Mash

Book of the week: Back in the news following that fatal crash, Richard Branson remains the acceptable entrepreneur to most Britons. His new book, The Virgin Way, explains how he does it.

Like these links? Subscribe to get them every week!

  1. Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.” []

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{ 2 comments… add one and remember nothing here is personal advice }
  • 1 Rob December 6, 2014, 3:58 pm

    This article deserves a wider audience
    The Behaviour of Individual Investors
    http://faculty.haas.berkeley.edu/odean/Papers%20current%20versions/behavior%20of%20individual%20investors.pdf

  • 2 david December 8, 2014, 6:31 pm

    The New Yorker article makes it seem like there is huge demand for hedge fund type stuff but ignores how index-heavy BlackRock and Vanguard each have more money under management than the entire hedge fund industry put together. It blasts hedge funds for losing on average 20% in 2008 when that was a very respectable return, as if they ever said they would never lose any money (only Madoff could “never lose” any money).

    It compares a 60/40 favourably to hedgies while ignoring how a 60/40 lost about 30% in 2008, more than the “awful” performance of the hedgies. It has a bizarre section on risk-adjusted returns that doesn’t even bother showing risk-adjusted returns for anything. The article is the kind of thing I expect from the mainstream media – short on facts, long on hyperbole.

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