Tuesday, May 3, 2016

Calling Out Hedge Funds

Recently I am seeing more and more people coming out to criticize hedge funds.  At Berkshire Hathaway's annual meeting, Buffett came out with a blunt attack on hedge funds calling them a net negative for investor returns and stating the obvious:  they are massively overcompensated to underperform.  This is obvious for everyone who can just look at the plain facts and past records comparing a 60/40 split of equity index/bond index funds would have trounced hedge funds over the past 20 years.

The hedge fund compensation of 2 and 20 was only designed for those that could actually outperform the market and provide alpha, not disguised beta.  It is no wonder almost every two-bit Wall St. trader wants to be a hedge fund manager.  It is the equivalent of being paid 2%/year to receive a call option on 1 year's worth of trading which usually underperforms the S&P 500 or even the bond index.  If the call becomes too far out of the money (i.e. big drawdown), you can always close out the fund, return the depleted capital to investors, and start up another fund with no high water mark.  Boom!  Clean slate.

I would never invest in a hedge fund and the ones that most would want to invest in (Jim Simon's Renaissance main fund) don't take outside investors.

We are getting volatility near the top after a big move off the February lows.  The first pullback should be bought, and we are near completion of the first pullback.  I would lean on the buy side if we get to SPX 2040 later this week.

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