Hedge fund managers suck at making money (for you)

The Financial Times analyzed the stock picks of the presenters at this week's Ira Sohn Investment conference in NYC and found that, on average, following a hedge fund manager was a much worse bet than buying passive index funds (though a couple hedgies did do pretty well last year, they were dragged down by the spectacularly wrong advice from the majority):

But a Financial Times analysis of last year's tips shows decidedly mixed results. An investor who followed every top idea from the 12 speakers last year would have made 19 per cent, less than the 22 per cent gain available from a passive index fund tracking the US stock market.

Many of the ideas have proved woefully miscued, including some from the most high-profile managers who will return to the stage on Wednesday: David Einhorn of Greenlight Capital and Bill Ackman of Pershing Square.

Tips From Wall Street Hedge Fund Gurus Fail to Reward Faithful


  1. These people work in the meta-mystical realm of influence rather than the real underlying value of a stock.  They’re not in it to make money for us – their clients simply provide the capital for them to get rich.

    So long as they provide what appears to be an adequate return according to the excpectations of their well-heeled clients, they’ll continue getting cash, and trying to push the markets around.

    I’m not a big fan.

  2. The ultimate problems is that most hedge fund managers are competing with other people with the same information.  Theoretically they should all be about equal, except that the hedge fund manager has to pay his overhead and thus takes a cut from what your money earned.  In fact if your hedge fund is constantly beating the market, that’s usually a good sign that he’s either a scam or is about to be brought up on insider trading charges.

    Time and time again the most reliable way to get a good return is to find the fund with the lowest overhead.  This is usually index funds, because nobody needs to really manage them, you can do pretty much everything on a computer automatically. 

    The only people who get rich on hedge funds are hedge fund managers.

    1. One can’t help but be impressed by the charisma and/or chutzpah that has kept hedge-fund managers from joining the ranks of the easily automated and obsolete workforce…

      People who earn 8 bucks an hour get canned all the time for being less efficient than robots. You’d think cost centers of that magnitude would be first against the wall…

      *cough*Because we all know that Markets Are Rational*cough*

    1. 19% is a massive gain but it’s on the back of a rapidly (senselessly?) expanding stock market, as the index fund shows.  Not beating an index fund is the same as getting less than 50% on a true or false test.  Just because we are willing to reward these people with billions of dollars for basically getting it wrong doesn’t mean that they didn’t get it wrong.

      Edit: A better analogy – Imagine you were handed $1B to invest for no reason and you got to keep all of the proceeds. At the end of a year you have $863M left. You might well point out that $863M is a massive gain, but everyone else would still be right to point out you lost money.

  3. What’s amazing also is, once these people become ‘famous’ in the client world, they can raise enormous sums even though they’ve previously screwed the pooch sideways and done jail time.

    Check it – John Meriwhether (Long Term Capital Management, which in the 90’s just about destroyed the world) dipped back into our pockets again and again:

    The mink-wearing classes don’t particularly care.  Under-educated and overloaded with cash, they simply respond to messages of ‘you can have more than ever, more than anyone, so much you’ll disgust even yourself’

    btw Hedge Fund Managers eat baby unicorns at lunch.  That’s why we haven’t seen any in the wild in such a long time.

    1. As with most topics, just because it’s ‘news’ doesn’t mean we’re all on the same page of the story.

    2. One of the primary tasks facing rich people is the prevention of the spread of information about how much they have and how they make it.

      Competition is best when it’s blind and directionless.

  4. Aren’t hedge funds more about managing risk than making maximum return (hence the term “hedge”)? Seems to me that they should almost never have returns that correlate to major indexes, but rather, aim for doing moderately well (or at less volatile) in both down and up markets.

    I don’t like them because their fee structure is pretty outrageous (2-4% of all your money every year).

    Note: My money is in broad index funds.

    1. This.  Investing long term isn’t just about raw return data, it’s about managing risk.

      This is why these hedge fund guys underperformed.

      Or you can just stick your $ into a passive index fund and see whats up.  Remember, a passive index fund would have ridden the 08-09 crash right to the bottom.  You have to ask yourself, would you have been ok with that?  Most people could not have stomached that, and would have been freaking the hell out. Not saying one of these HF managers would have done better, but chances are, they would have (or did).

      1. Although, if you were at the same time (and all the time) practicing the time tested method of dollar cost averaging into said fund, you’d be scooping up shares at low prices in 08/09.

    2. No, that’s what hedge funds originally did.  Today they do whatever the hell they want, and enjoy insane tax benefits, and socialize the losses to the taxpayer.

      And this article isn’t terribly surprising, because a hedge fund isn’t a mutual fund, and picking stocks isn’t how they make their money. They make their money by exploiting corporate law and political connections to squeeze as much short-term profit as they can from a company, and then dumping it before anybody notices.

      For example, Ripplewood Holdings didn’t buy Hostess because they love Twinkies.  They bought Hostess to milk all the cash out of the business, rob the pension fund, mortgage everything to the hilt, declare bankruptcy, and blame the greedy union. Everybody wins – if, by everybody, you mean Ripplewood Holdings. See also: Staples/Bain Capital/Romney.

    1. I’ve always thought that the people making the most money have been the best at dissecting the norms and educations that the money world receives in majority, then works out strategies to take advantage of the senseless bits in it all.

      Politicians don’t care.  Regulators are weak.  People are irrational, despite every wish and dream of economists.

  5. I’ve been looking into index funds lately, and I’m a little disappointed that you can’t easily invest in an arbitrary stock index. In the past four years, the Dow Jones Internet Commerce Index has gone up 199.62% according to Google Finance, a 31.6% increase per year. Vanguard Small-Cap Index Fund Admiral Shares is listed as a 113.06% increase, or 20.8% annually. Still great, but not AS great.

    1. Shay, if you really want to invest in DJ Internet Commerce Index, there are ETFs that do just that.  Google this:  NYSEARCA:FDN

      As for 4 year window, that’s a good example of cherry-picking the dates to burnish the performance.  Look at the same index over 10 years and it looks a lot worse.

      1. Measuring the index’s performance in itself wasn’t the point; my purpose was comparing it to something else’s performance over the same timespan. But thanks for the ETF tip; it’s not something I’d thought of, but it looks like that fund’s tracked that index pretty well.

  6. This has been fairly well-known for a long time, but like the lottery, the conditions persist because the people who invest believe  they’re going to get a lotta something with their little nothing.  Try telling this to all the people who invest in hedge funds, and they’ll just repeat back whatever the hedge fund manager has told them to say, because people are zombies.  

  7. If someone  selling something has to go to you, instead of you going to them, it’s probably a safe bet that they’re hucksters of the worst kind.  Most of these doofuses (aka hedge fund managers) are the Tony Robbins of the finance world, selling snake oil to the financial illiterate in the hope that it will ‘cure’ their financial condition (and enrich the hedge fund managers).  

    1. I’m told that investing with Bernie Madoff used to be a pretty exclusive opportunity, cool kids only…

      1. Bernie was always trolling for new victims in the tony social circles he frequented, in order to continue his pyramid scheme.  

  8. The Efficient Market Hypothesis states that no one can beat the market in the long term. But there can be no market if people don’t try to beat it.  Now there’s the Catch-20 of our times (I took 10% of the catch for my fee).

    1. Modern Wall St would be a great setting for the sequel to Catch-22.  Someone please write that for my reading pleasure.

  9. It was fun recently seeing a bunch of hedge fund idiots posting frantically on Reddit trying to defend hidden offshore bank accounts used by shell corporations that were exposed by wikileaks.

    These people are scum.

  10. Hang on. This is evaluating the “advice” – or rather, some random stock tips – they handed out for free at a conference.

    It’s not looking at how these managers performed for their actual clients.

    In other words, it’s pretty bogus.   

  11. I’m not a fan of these guys either, but there’s some very poor inferences being drawn here. 
    First off, it’s not a Hedge Fund’s job to make money for ‘you’. It’s their job to provide good risk-adjusted returns given a time-horizon, risk-appetite, and certain other fund-specific mandates. As Alosius points out, the risk-adjusted information is entirely absent here. The rest of the strategy information is absent as well.
    Second, the study makes the simplifying assumption the hedge fund managers were suggesting you buy these stocks the day they recommended them, and held them for precisely one year (presumably equal dollar-weighted at inception). No allowance is made for the fact that the managers may have sold their positions in the meantime for a higher (or lower) gain. Even ‘passive’ index funds trade intra-year to rebalance. 
    Nor is there any allowance for positions may have been hedged, or fit within a larger portfolio strategy.
    Additionally, the sample size is terribly small, and there’s no statistical analysis. Do we even know that the 19% is significantly different from the 22%?

    Assuming it’s significant, a fair conclusion to draw is that buying stocks on tips given publicly by hedgies and holding them for a year is more likely than not to under-perform the index. 

    I’m not saying you should like the guys, but bad conclusions from bad science are just bad. 

  12. Later this month I
    have a presentation to a group of high net worth investors who are all
    in hedge funds, overpaying for under performance. (speech is called “Romancing
    Alpha, Forsaking Beta”) 


    The whole room is
    filled with people who have no idea how their main investment vehicles — Hedge
    Funds – have underperformed for a decade — thats before fees.
     After fees, they totally stunk the joint up even worse. 


    BTW, the Venture
    capital funds aint much better: Today’s NYT: A Humbled Kleiner Perkins Adjusts Its
    Strategy )


    Kleiner venture
    funds — here are their numbers: 

    1994 fund delivered 32 times the investors’

    1996 fund 17 times

    1999 fund six times

    2000 fund unprofitable

    2004 fund unprofitable.  

    2008 fund unprofitable.    

    Starting to look like they got lucky during
    the 1990s tech boom, and their investors where fooled by randomness (Never
    confuse a bull market with genius is an old expression). 

    Oh, and
    KPCB manages $7 billion dollars . .  .


  13. there was a study in the 90’s that reviewed MANY economic issues, and then looked at how the ‘economists’ dealt with it, and it found that their ‘suggestions’ had almost a ZERO success rate.  anyone know how to find that?

  14. It gets worse.

    Hedge fund managers typically charge 2% of assets under management and 20% of profits in fees.  Then, in the US anyway, they are able to claim this income as Carried Interest and pay much lower taxes than they would if it were considered to be ordinary income. (All while managing other people’s money.) These managers protect “The Carry” with the force of Caesar’s armies.

    Now, there is a major push by the Securities and Exchange Commission to eliminate the ban on direct marketing, and hedge funds (many alternatives, in fact) are exerting enormous pressure for access to defined contribution plans–particularly Target Date Funds–because defined benefit plans are drying up. These are both monumentally bad ideas.

    There’s nothing inherently wrong with hedge funds per se, and the market neutral variety would typically lag the market. But study after study has found that your average, run-of-the-mill investor is better off in low-fee index funds and ETFs.  And, even better, low-fee Target Date index funds.

  15. Hedge fund managers make money for themselves, not by being better stock pickers but by their fees.

    1.  In fact, their strategies are generally to maximize their own income, and any gain the sucker gets is just a byproduct.  My father ran into a similar phenomenon a half a century ago:  Whenever he invested in a stock based on his own research and judgement, he made money; whenever he invested in a stock that was recommended by his stock broker, he lost money.

Comments are closed.