According to Bloomberg, Hedge Funds underperformed the S&P 500 for the fifth year in a row. On average, they delivered 7.4% vs. nearly 30% for the S&P.
This isn’t surprising.
Several years ago, legendary investor Warren Buffet bet $1 million that the S&P 500 index would bet Hedge Funds over a ten year period. At that time, the index was deep in the hole, having been down about 38% in 2008. Hedge Funds were slightly ahead, being only 24% down that year. (To see the arguments on both sides of the actual bet , click here).
But since then, the index has pulled ahead.
And that’s not surprising either.
Hedge funds are designed to make their managers and employees rich – not the investors.
Even if it were possible to accurately predict the future, repeatedly and consistently over a long period, the exorbitant fees charged by Hedge Funds make it unlikely the investors would actually prosper.
Hedge Funds usually charge a flat 2% per year of assets under management. Additionally, they levy a 20% performance fee on top of that.
Even if you were naïve enough to believe that a superior manager could outperform the market by 2-3% a year, paying 2-and-20 in fees would put you behind.
No wonder Buffett made a $1 MM bet.
In case you’re still debating whether to put your hard-earned money in a Hedge Fund, I strongly recommend this book: The Big Investment Lie: What Your Financial Advisor Doesn’t Want You to Know by Michael Edesess.