Hedge Funds Struggle, a Rebuttal, and a Rush into Apple

By on August 24, 2012

Hedge FundsHedge funds have been in the news lately. Recently an organization called The Alternative Investment Management Association (AIMA) issued a long rebuttal to Simon Lack’s book The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True. Lack made the ugly accusation (to AIMA) that from 1998 through 2010 investors would have done better investing in Treasury bills yielding 2.3 percent than hedge funds. AIMA’s complaints [link] put the spotlight on hedge fund performance (perhaps unintentionally).

I could go into the issues brought up by AIMA and there are many, but that would take a lot of effort and I don’t feel like wasting my time since another blogger (Felix Salmon) performed a better analysis than I ever could [link]. Besides, I know enough about hedge funds and their fees to recognize them as a poor investment vehicle. Anyone with a not-so-deep understanding of mathematics and basic statistics realizes this, no matter what a paid shill like AIMA might say.

It was recently reported only 11 percent of hedge funds are beating the S&P 500 this year [see video below]. Matt Taibbi, writing for Rolling Stone Magazine, concludes this is more evidence Wall Streeters are overpaid [link]. Taibbi also finds that hedge funds, in an effort to boost their sagging returns, have stepped up their buying of Apple (AAPL).

I’m actually surprised that many hedge funds (11%) are outperforming the market given the strength stocks have exhibited this year. One expects hedgies to maintain some short positions which would mute returns to the upside (while supposedly allowing them to perform relatively well during downturns…a challenging supposition as it turns out). Attain Capital Management concludes that some areas of the hedge fund complex has shown evidence of outperforming during downturns, but you appear to pay heavily during the eventual recovery [link].

Personally, I’m having a heck of time trying to keep up with the U. S. large caps (brings back memories of 1995-1999). However, I don’t need to pay 2/20 (onerous in my opinion) to a kid with a degree from some overpriced highfalutin university to provide dubious protection during a sell-off. There are ways to accomplish this myself (sell portions of overpriced holdings and re-invest in short-term bonds while awaiting the next inevitable man-made panic).

2 Comments

  1. John Bogles Apprentice

    August 27, 2012 at 3:53 pm

    As hedge funds become larger they become the market with the result being a zero sum game. Research becomes futile in this environment and outperformance is more the result of luck or gaining access to inside information. Of course, inside information will add a much smaller boost to a large, successful hedge fund. Therefore, the reversion to average is one of the laws of investment physics.

    Read more at:

    http://online.wsj.com/article/SB10000872396390444082904577605240804189020.html#articleTabs%3Dcomments

    http://www.ft.com/cms/s/0/0dc3dd2a-ec6b-11e1-8e4a-00144feab49a.html#axzz24mHOlmH5

  2. hedge fund traders x

    February 18, 2013 at 11:22 am

    Thank you for your post.Really looking forward to read more.
    Cool.

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