Where Have All the Real Hedge Funds Gone?


People think of the super-rich they immediately think of hedge funds. The aura and mystique that surrounds it is second to none. Young people entering the finance world would kill to get their foot in the door at a hedge fund. Financial news reports the absurd amounts of money the managers of these hedge funds make. Over the past decade the hedge fund industry has exploded. There are so many hedge funds they are a dime a dozen.

My dream as a financial wizard is to one day have my own hedge fund but when someone tells me they work at a hedge fund or tell you about a guy who has one I am not impressed. After hearing them tell me these stories I immediately want to know the name of the hedge fund and assets under management of the hedge fund. The truth is majority of brokers or run of the mill advisors, have fled to the hedge fund industry to run their practices or businesses. They are set up as a hedge fund so they can operate under hedge fund rules and regulations. Majority of hedge funds are a joke. There is nothing there to impress anyone. The management is not complex and there is nothing luxurious about it. All these hedge funds represent is a way for these so called financial professionals to extract higher fees and more money from the clientele.

The original goal and concept of the hedge fund was to be a vehicle for people with large sums of assets and money to be able to invest in what was considered fringe or complex investing. For this complex interesting management being provided the mangers are allowed to charge a large or exuberant fee known as 2 and 20. That is a 2 percent overall management fee and 20 percent of the return made for the year. Regular run of the mill salesmen of financial advice have flocked over to this model.

It’s had a very negative impact on the hedge fund industry. These firms do not hold themselves to the traditional standard of what the purpose of hedge funds is.  The premise of a hedge fund is vastly outperform the general markets. These firms basically index themselves. Track the S&P 500 and go overweight certain sectors or they act like a managed mutual fund. It’s pathetic and pure garbage for a hedge fund to be managing money like that. The result is hedge funds overall have become beta or below beta. For people who don’t know what beta is that is a value associated with how an investment changes in value compared to the S&P 500 (overall market). The value of 1 is associated with an equivalent change. If its lower than 1 it under performs, if its above 1 it outperforms and if its negative it does the complete opposite.  On top of the lackluster returns since 2008 as you can see in the charts below they are becoming completely correlated with the S&P 500.


The more repulsive chart is the next one. It actually shows the trend in annualized returns and its horrible. Complete under performance. No alpha! The fact they can charge what they charge for horrendous management should be illegal. Complete and utter garbage. 20130610_hedge1

So the next time your out and someone tells you they work at a hedge fund, please for your sake make them name drop themselves. If it is a name that anyone in the finance biz doesn’t immediately recognize please do not be impressed by that individual at all until they prove you otherwise on some kind of other merit. Majority of these people are all talk and douche bags by providing terrible service at sky high prices.

Let it be known I set the record straight. Don’t pay hedge fund prices for a no-load index mutual fund.

He Hate Me