Thursday, November 8, 2012

Investing: Hedge Fund Managers - Just A Bunch Of Swashbucklers?

Hedge fund managers are the rock stars of the investment world ( The whole industry is called "smart money"; they often juggle with billions of dollars and collect absurdly high fees. Journalists are gluing at their lips and are quoting any comment of a hedge fund manager as it would be the epiphany of a messiah.

But in reality hedge funds don´t rock much. In fact, their performance is quite pathetic. This year hedge funds underperformed severely compared to the S&P 500, which represents the US stock market: "The average hedge fund has made its clients 4.86% this year, data from industry tracker Hedge Fund Research shows, far below the 12 or so % investors would have got if they bought a fund tracking the S&P 500", wrote Reuters on November 2nd (

And this isn´t an exception. "Over the past three years the average fund is up less than 4 percent while the S&P 500 is more than 30 percent ahead" ( Joe Sixpack who bought just an ETF on the S&P 500 and has been sticking to it (buy-and-hold strategy) did much better.

Also striking is a comparison of the total returns of the HFRX Global Hedge Fund Index versus the Vanguard Total World ETF, which represents a global stock investment.  "Had you invested $10,000 in both indices at the beginning of 2009 when the global economy was starting to recover you would have a total return of 11.12% in the HFRX versus 53.41% in the Vanguard Total World fund", writes the blog Pragmatic Capitalism (

This underperformance signals that there must be something wrong with these allegedly rock stars.

The continuous underperformance shows that the hedge fund majority has been too pessimistic. They have been underestimating the recovery of the global economy and ignoring signs of strength like the solid US consumer spending. The fact that the bulk of the hedge fund managers have been missing the opportunities for years shows that they lack the superior economic understanding they claim to own.

Many of the portfolio jugglers have a very short time horizon. They don care much for the long term growth of the economy and are ignoring the merits of long term investing. Instead many hedge fund managers are just betting on short term events and alleged opportunities. This leads very often to mistakes and causes high costs - at the expense of performance.

Many hedge fund mangers are simply following the herd ( They buy when others purchase and they dump when others sell. Hence they very often liquidate their assets on weak days and buy them back on strong days - which causes hefty losses of course.

In face of their failures hedge fund mangers usually are making a lot of noise and appear in the public as allegedly financial gurus. This seems to me as the typical behavior of people who overestimate themselves. Maybe we should just call the average hedge fund managers just "swashbucklers".

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