Investing

Poor Hedge Fund Managers

But their take-home pay is none too shabby.

|

Hedge Fund Myth
Bloomberg

The great thing about markets is that they encourage learning among participants. Sometimes the learning may take awhile, though. An article in today's New York Times reported that the executives who run the top 25 hedge funds took home $11.62 billion in compensation last year. However, the Times further noted:

For investors, 2014 was the sixth consecutive year that hedge funds have fallen short of stock market performance, returning only 3 percent on average, according to a composite index of 2,200 portfolios collected by HFR, a firm that tracks the industry. Hedge funds are lightly regulated private pools of capital open to institutional investors like pension funds, university endowments and wealthy investors.

For example, Bridgewater Associates executive Ray Dalio earned $1.1 billion while his All Weather Fund ended the year down 3.9 percent. in fairness, his Pure Alpha fund did rise 5.25 percent.

Three percent? In 2014, an S&P index fund would have returned 13.68 percent when reinvested dividends are included.

Hell, I just looked at my Merrill Lynch quarterly performance report and found that over the past 7 years the S&P average was 8.95 percent and my return (i invest in a lot of risky biotechs and infotechs) was 8.03 percent over that period. Sadly, at no point did my investments out-earn the S&P over the past 7 years, but my returns have never fallen below 7.9 percent per year in the past seven years. That's a lot better than 3 percent.

So are there any hedge funds hiring at a modest salary? I will work cheap—say, $10 million per year to start?

NEXT: Seattle Reasonoids: See Anthony L. Fisher's Film "Sidewalk Traffic" on Fri May 8

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Alt Text = HAWT

    1. If your hedge fund lasts for more than four hours, call more ladies!

    2. Well, I’d suggest that having a wonderful time is often dependent upon one’s perception.

      Nuk, nuk, nuk.

    3. I make up to $90 an hour working from my home. My story is that I quit working at Walmart to work online and with a little effort I easily bring in around $40h to $86h? Someone was good to me by sharing this link with me, so now i am hoping i could help someone else out there by sharing this link… Try it, you won’t regret it!……
      http://www.work-cash.com

  2. ๐Ÿ™ My return was around 6% on what little I have invested.

    1. No problem! Issue projections for next year at 8%, and cut how much funding you send to your portfolio.

      Fixed, just like state pensions.

      1. Now where I have I heard claims of 8% before?

  3. Just amazing that so many people are able to accumulate so much money without understanding efficient markets theory.

    You don’t even need an econ course. Just ask: if I start $1.1 billion in the hole because I gave that money to the guy managing my investments, how much of a return do I need on what is left in order to break even?

    Then, go out and buy an extended market index fund.

    1. Just amazing that so many people are able to accumulate so much money without understanding efficient markets theory.

      Division of labor makes all the difference. It’s the same reason there are billions of wooden pencils in the world and not a single person on Earth knows how to make one in it’s entirety.

      1. Then how would you know where to invest?

      2. It’s also the same reason that the left is wrong when it assumes that wealth will inevitably be all concentrated in the hands of a few wealthy faamilies.

        The ability to make money =/= the ability to invest it well

        1. The left doesn’t understand the difference between money and wealth. It’s all the same to them. Income too. And they assume that wealth just grows, like magic. No work or risk involved. Once you’ve got a lot of money/wealth, you’ve got it forever. That was one of the central fallacious premises to Piketty’s “masterpiece.” Wealth just grows, which means that unless the wealthy are torn down by force, then they’ll just accumulate all the wealth. That’s what happens when you add in the fallacious zero-sum economy premise. Put it all together and you’ve got the rich getting richer and the poor getting poorer, until everyone is a slave to a rich person.

          The left sure loves their fallacies. After all, they feel true, so they must be true.

          1. My favorite is the Scrooge McDuck fallacy that wealth people hold their wealth in the form of a swimming pool of gold coins.

            That’s how the minimum wage creates jobs. You see, raising the minimum won’t raise prices or reduce employment. It just forces Scrooge to take some of those gold coins out of the pool and spend them. This creates more wealth in the community, and everyone is richer, just by the stroke of a pen!

            It’s how tax hikes create jobs as well. If government didn’t take that money and spent it itself, it would just lie there in the swimming pool doing nothing!

            1. My favorite is the Scrooge McDuck fallacy that wealth people hold their wealth in the form of a swimming pool of gold coins.

              I for one, would pay to see leftoids diving head first into pits filled with little discs of metal.

            2. recently had a similar discussion with my college liberal brother
              he believes we should increase taxes on the wealthy and increase estate taxes so “that money can go into the economy and go to someone who will use it instead of it just sitting around”
              i tried to explain how that money gets invested and businesses use it to fund new projects, research, hire more people, etc. but he’s a libtard so im sure he just ignored me
              amazing that someone with almost a completed economics degree doesn’t understand how investing and money markets work

              1. It’s not about economics.

                It’s about fairness.

                It’s not fair that the wealthy have so much wealth compared to everyone else.

                It’s not fair that they leave it to their children who did nothing other then be born to the right parents.

                It’s just not fair.

                Not fair not fair not fair!

                We need government to DO SOMETHING!

                You can’t reason someone out of a conclusion that they arrived at by emotion.

                1. lol so true
                  “It’s not fair that they leave it to their children who did nothing other then be born to the right parents.”

                  he literally said almost exactly this and i was like so what? no one ever said the world is fair, or even that it should be fair. not to mention how unfair it is to the parents who worked their whole lives to earn that money so that they could pass it on

                  liberals are like children

              2. And in case you think this is a strawman, here is what I just read over on Slate in the comments on an “everyone wants to soak the rich – why can’t we do it?” aticle:

                “The super-rich are the sump where the national wealth has all accumulated. The national wealth of what was once called the richest nation on earth is no longer circulating. Its not a question of ‘fairness’ its a question of simple mechanics. The engine is malfunctioning.”

                Scrooge McDuckism, exemplified.

                1. “The national wealth of what was once called the richest nation on earth is no longer circulating.”

                  damn, talk about ignorance. i mean that’s just 100% false
                  it really is exactly like you say, Scrooge McDuckism

                  This is why we need to start teaching economics in high schools again

              3. It is actually worse than that.

                The bulk of the estate tax is not cash assets but rather real property or a stake in a business. Estate taxes frequently result in the property/business needing to be sold off or shut down to cover the taxes.

          2. So the left then, because they don’t understand the difference between money and wealth, feel angry that some people own stock in companies while others don’t. That’s money that could feed starving children. Except that it’s not money. It’s wealth. Try to correct their error and you get a heated emotional response, because they fucking feel it’s true so you must be a fucking wealth-apologist who licks the fucking corporate boot that holds you down. Or something. Willful idiots.

            1. I also get a kick out of their incredibly naive idea that they can just confiscate all that wealth, again as if it were Scrooge McDuck pools of gold and cash. It isn’t; it’s investments, and its only value is the dividends or sale value. But if they confiscate all that wealth, they can’t sell the stocks and bonds because the only people who could have bought them have no investments left with which to buy them.

              So go ahead, dipshits, confiscate 75% of people’s invetsments. You’d be like the dog that finally caught the car — whacha gonna do with it?

              1. So go ahead, dipshits, confiscate 75% of people’s invetsments. You’d be like the dog that finally caught the car — whacha gonna do with it?

                Put government, as in The People, in charge. That way it belongs to everyone. Spread the wealth.

                Then watch the incompetent fools destroy it all.

                1. Dividends don’t provide enough return. They’d want the big bux you get from selling the stolen investments, and that’s where they’d hit the brick wall.

                  Ordinary thieves haven’t got the patience to sit on what they steal and use it, they always fence it fast and cheap. These government thieves are just as impatient, only they aren’t as smart as ordinary thieves, who realize there are some things not worth stealing because they can’t be sold.

              2. Nationalize the company, then hand out all the profits to the pipples.

                Until the government runs the business into the ground, and jacks up the payroll with members of favored voting interest groups, that is, at which point they need to find new victims.

                1. Confiscating the wealth would be a defacto nationalization as the government would now be the largest (often sole) shareholder in the corporation

  4. For investors, 2014 was the sixth consecutive year that hedge funds have fallen short of stock market performance, returning only 3 percent on average,

    But they’re measuring against the same stock market that ‘performs’ well every time the government dumps some money into the economy so more dollars seem to be chasing the same amount of goods.

    The perverse incentives created by the Fed, government programs and tax law makes it an unreliable indicator of the productive value of the economy. Perhaps the lower ROI from hedge funds has something to with it being less regulated and therefore less distorted. So then maybe it’s a more accurate portrayal of production and capital accumulation than the stock market or the CPI or other manipulated indicators.

    Now why performance goes down and take-home pay goes up I’m not sure exactly, but I’d put money on the idea that the unnaturally high amount of wealth that’s herded into the financial sector by the state has something to do with it.

    1. The state isn’t herding money into the equity markets.

      Equity market valuations are not reflective of the current state of the business cycle. They reflect expected future earnings.

      1. The state isn’t herding money into the equity markets.

        There are absolutely tax incentives to park your money in financial instruments that invest in equity markets. “Nice capital you got there. It’d be a shame if something would happen to it.”. That is by definition, a perverse incentive. Tax breaks are nice and all, but like those associated with 401(k)s, they absolutely steer money into equity markets that wouldn’t otherwise be there without the threat of that capital being stolen by the state.

        1. You are correct – capital gains tax rates and their level relative to rates on other forms of wealth creation do distort the capital markets. However, the direction of the distortion and its extent depend on the current and expected future state of the tax code.

          Expecting capital gains rates to continue to favor investment income over labor income is risky. Sure, politicians talk about taxing “the rich” much more often than they actually do it, but anticipating some kind of backlash is not a ridiculous concern.

          1. However, the direction of the distortion and its extent depend on the current and expected future state of the tax code.

            I think betting on draconian levels of taxation is a safe bet in light of the monumental amount of debt held by all levels of government.

            1. Haven’t you heard? As a soverign entity able to print its own money, the US government can NEVER have too much debt, and can simply print what it needs to cover any existing or future obligations. The only obstacle to printing our way into prosperity is the evil Koch Brothers. /derp

              1. I have heard such derp as it happens ๐Ÿ™

    2. Yes. Remember that 8% returns where what CALPERS and other government pension funds were counting on for their projected returns…forever. Even though 8% is really fucking high and not realistic over the long term. And that’s why those funds are fucked because 8% year after year is just not feasible. Yet people still somehow expect that because…it happened for a few years during a boom.

      The market is so fucking distorted at this point that it’s a crap shoot. Literally. Investment was always gambling, but the risk was extremely low if you invested certain ways. Now…who the fuck knows. If a monster player like Enron can suddenly be worth nothing because of hidden corruption, if the government can just bail out massive industries at any time, if they can just print more money whenever they want, what is the market really?

      1. actually 8% is possible
        in the most conservative model we have at my firm (80% fixed income) we still have gotten over an 8% return net of expenses and fees over the last 20 years

        there are benefits to actively managed funds, if you know how to choose them

        1. Or, someone has to be the world champion coin flipper.

          1. OR just hire some CIA spooks and government insiders to give you advanced information on your investments.

      2. The average annual return on the S&P500;, going back to its inception in 1926, is over 11%.

        1. exactly, i guess what i’m saying is you can achieve an 8% return even with 80% of your portfolio in fixed income bond funds

        2. But the average annual REAL return is significantly lower. Many of the highest returning years also happened to be during periods of high inflation. I.e. 1975 return was 37.2 percent but with 9.2 percent inflation, 1980 return was 32.5 percent but with 13.5 percent inflation. From Jan. 1926 to Jan. 2015, the inflation adjusted CAGR (with dividends reinvested) for the S&P 500 is 6.9%

          1. Yes, but the real return on cash in your mattress is even less – negative, in fact.

            The original argument was that the stock market can and does generate real as well as nominal returns over time substantially above the risk-free rate (which is currently below zero in real terms).

            1. I don’t think I said anything to disagree with your point that the stock market is better than your mattress over the long term. The issue, I thought, was whether CALPERS assumption of 8% (actually it now assumes 7.5%) was realistic. My understanding is that CALPERS is actually assuming 4.75% real and that the 7.5% includes an inflation assumption of 2.75%, and it has 63% in equities of various sorts with the rest in a mix of bonds, real estate, and cash. If you just look at 1926 to present S&P 500, 4.75% real seems realistic. But, in my humble opinion, that’s not a very good gauge for CALPERS going forward since 1) equity valuations are quite high and that historically predicts underperformance in the near to medium future; 2) CALPERS has to pay out on its current promises in the medium term; and 3) CALPERS has a substantial investment outside the equity markets.

              1. CALPERS is clearly fucked. I’m looking around for my sympathy for those who will be left holding the bag, but I’m not finding it.

  5. Sadly, at no point did my investments out-earn the S&P over the past 7 years

    How many years of that would it take for you to dump your investments for an index fund?

    1. index funds will not out perform an index, nor will they (usually) match its returns
      an S&P index fund will get you pretty close to the return of the S&P, but not quite equal it

  6. when will people learn that hedge funds are stupid and pointless
    hell, even index funds will, by definition, lag the index they are tracking
    derpa derpa derpitty derp

    just find a good mutual fund with a good long term (10+ years) track record and long manager tenure with a risk level you are comfortable with, and stick with it
    it’s literally just that simple

    1. You’ll pay that long-tenured manager more than you will pay the computer that manages the index fund. And over time, that manager will produce returns equal to those on your index fund, minus what you pay him.

      An index fund will “lag” the index it tracks in the sense that it will perform worse than the index it tracks by the amount spend on fund expenses. It does not “lag” in the sense of not moving in the same direction, at the same time, by the same percentage, as the index does. If your index fund doesn’t match the performance of the index it tracks, you should fire the computer that runs it and hire a new one.

      1. when i say they lag by definition, i mean that the way a computer manages index funds causes them to lag (i.e. fall behind, not achieve the same return). this is because the index itself is just a theoretical thing, its just a list of funds. so when a new stock is added to the index, they “pay” what the stock costs at the moment it is put in the index, but no actual money is spent because they are not actually buying anything.

        So, once the index includes a new stock, EVERY SINGLE INDEX FUND NOW HAS TO BUY IT. Because these numerous index funds are required to buy that stock that was just added, there is higher demand for said stock. because demand is higher for that stock, the price goes up and therefore the fund pays more than what the index itself “paid” and therefore will not achieve as high of a return from said stock and will lag the index.

        1. Except that the stock will rise as soon as people anticipate that it will be added to the index.

          Buy the rumor, sell the news.

          1. i mean you are right that it will go up in anticipation, but it wont go up as much as it will once 300 massive index funds all try and purchase it at the same time

            supply and demand

            1. Buy it the day before it is added to the index, sell it the day after, and retire on your profits.

          2. This isn’t necessarily true. The last stock to be a added to the DJIA was APPL. The price of that stock barely budged. It stands to reason that many funds that “follow” the DJIA likely have other holdings such as AAPL and thus demand didn’t significantly spike.

      2. First bought in 2004.

        Somebody earned his money….

  7. This morning, the Bloombergousie talked about this briefly; they did a slick little bait and switch, moving the conversation quickly to short sellers, who do actually introduce useful information into the marketplace. Therefor, every hedge fund manager deserves to live in a thirty million dollar house in the Hamptons.

    1. Don’t sneer at the hedge fund managers. It takes a lot of talent to persuade people to pay you hundreds of millions of dollars for nothing.

  8. So Buffett recently won his $1 million bet with some hedge fund manager that he couldn’t beat the S&P 500.

    1. Didn’t you shit your pants back when Romney alluded to a $10,000 bet he made with someone?

      1. Principals, not principles.

      2. Not me. I would actually respect Romney if he made such a bet. I think you are referring to an instance in a GOP debate that went unanswered.

        I bet all all the time. On golf, football, and stocks.

  9. I don’t want to lose sight of the argument that hedge funds are not an investment, they are a gamble.

    If I invest in the stock market, I buy equity in actual companies that will, hopefully, create actual wealth for their stockholders. That is an investment.

    If I buy a hedge fund, I am buying a portfolio of bets. Some may go long on the stock market, some may short certain currencies. Whatever the billlion dollar brain of the manager thinks is best.

    So, you have no underlying real wealth creation to increase the value of your portfolio. Your expected return is the same as someone betting the spread on the weekend’s football games. Zero, minus the vig.

    1. i agree, i also don’t really see the point of hedging against (temporary) market declines when its proven that the market will go up 4 out of every 5 years

      1. Agreed. I get the appeal of a zero or negative beta investment, but not of one with a negative expected return

        1. There is no such thing a negative beta. A beta of zero is a risk-free investment. That is the ideal portfolio, which would be an investment with the risk of a T-bill, but a greater return.

  10. The state isn’t herding money into the equity markets.

    Federal Reserve interest rate policy has sent investors into the equity markets in the quest for return.

  11. A quibble =

    the punning-‘conclusion in the headline’ is misleading at best.

    They’re called “Hedge” funds for a reason.

    A typical plain-vanilla hedge would be to own your index fund (e.g. SPY, VIT, whatever)… then ‘hedge’ your downside by buying monthly rolling puts on the current market value, ensuring that if there is a significant (10%+) drop in the market, you will be protected.

    The ‘cost’ of this kind of strategy, depending what % of AUM are hedged, by how much, over what period of time, etc, can vary wildly. But assume 3-5%.

    So if the market grows 10% over any period? At best you’re earning 5-7%.

    But after being *adjusted for risk*? (assume 10-15% std deviation); you are actually beating the market on a risk-return basis than if you’d just randomly bought in at some point and sold at any other point.

    To be fair = plain vanilla hedges are not what most funds *actually* do.

    Its often a wide combination of things – like “short only” funds, specialized EM funds, risk-averse/equity neutral funds, and all sorts of exotic alternative strategy options.

    These are incomparable to ‘total market’ returns, and are *supposed to be*, by design. The reason they exist is to offset ‘pure index’ exposure for large institutional investors like Pensions, Insurance markets, Investment banks, etc. Most hedgies dont even serve retail investors at all.

    Does this mean they’re *not* overpaid douchebags? Not at all. But the article doesn’t help clarify anything.

    1. Yeah.

      It’s also worth qualifying that most people don’t and never will invest in a hedge fund, more than at maybe two levels of remove.

  12. For investors, 2014 was the sixth consecutive year that hedge funds have fallen short of stock market performance

    One would expect the general stock market to surpass hedge funds most of the time. They’re not intended to be a primary investment vehicle. They’re only supposed to be a hedge to reduce losses during a downturn. Hence the name “hedge fund”.

    It would be like an article complaining that most people have poor returns on their homeowners insurance as their homes failed to burn down last year.

    1. “They’re only supposed to be a hedge to reduce losses during a downturn. Hence the name “hedge fund”.”

      While the first parts of your statement before that were 100% correct (as I note above), this isn’t exactly right.

      The actual Hedge Fund Index includes the following=

      Convertible Arbitrage
      Dedicated Short Bias
      Emerging Markets
      Equity Market Neutral
      Event Driven
      -Distressed
      -Multi-Strategy
      -Risk Arbitrage
      Fixed Income Arbitrage
      Global Macro
      Long/Short Equity
      Managed Futures
      Multi-Strategy

      Only a few of those are “risk-hedging” – others aren’t even domestic Equity strategies – some are intended to be *completely inverse* to market behavior

      I personally don’t think lumping 31 flavors of unrelated stuff and calling it a “hedge fund index” makes any sense at all frankly. Indexes are generally ‘correlated assets in the same category’; not wildly different investment strategies. Saying anything about them ‘in total’ is made meaningless.

  13. I could be off the mark here, but given the performance of the S&P 500 and DJIA, it would stand to reason that a true HEDGE fund would not perform as well. The purpose of these funds (originally anyway) is to protect against a down-turn in the general stock and/or bond market. Therefore a true hedge has a negative correlation to the stock market in general, or ideally your stock and bond portfolio. The fact that the funds are returning positive, means that they are either not so negatively correlated, or all assets are performing really well and if the stock market goes south, the hedge should skyrocket. This is assuming they are truly hedging.

    1. See above.

      A ‘short fund’ would be negatively correlated. A plain-vanilla hedge (after costs) simply neutralizes or reduces a percentage of an asset’s market category correlation.

      And, as noted twice, the vast majority of “hedge funds” are *not plain-vanilla hedges* anyway. They’re a wide variety of types of asset strategies which other types of investment institutions are prevented from doing directly due to regulations. They’re the “miscellaneous bin” of investments, so trying to describe them in any generic way is misleading at best.

      1. I did say that the assumption was that they were truly hedging ๐Ÿ™‚

Please to post comments

Comments are closed.