40,000 Reasons to avoid Hedge Funds - The Hyperion Effect

Hedge funds were all the rage as the world emerged from the Tech wreck in the early 2000′s and as the market strated to move upwards people invested in them in droves (including yours truly). However their claims of consistent returns and low volatility turned out, mostly, to be just that, claims, as when the crash came in 2008 their returns were no better (or worse) in most circumstances that the average fund manager.

We moved away from them many years ago when we adopted our low cost, Asset Class Investing Model which has proved to be a wise choice. So I read with some interest an article titled Are there 40,000 exceptional hedge fund managers out there?. Apparently the answer is yes and no, in that there are 40,000 people employed by around 8,000 hedge funds but very few of them are exceptional.

This declaration came from one of their own in Howard Marks from Oaktree Capital who recently said

Only exceptional people should get exceptional compensation,” he declared. “There are 40,000 people in 8,000 hedge funds making decisions and getting 20% of profits. Are there really 40,000 extraordinary people out there?” Given that the industry underperformed most other asset classes last year, the answer is probably no. “There needs to be a shakeout,” Marks said.

This theme was supported from another industry figure, and many might argue its most famous, in George Soros who recently declared at Davos that

“Since hedge funds are now a dominant force in the market, they can’t, as a group, outperform the market,” he said. “Outperforming the market with low volatility on a consistent basis is an impossibility. I outperformed the market for 30-odd years, but not with low volatility.”
Recent performance has supported these claims with very few funds out performing standard industry benchmarks and again demonstrates that long term, low cost investment management almost always wins out in the long run.

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