Hedge funds sell themselves as investments for elites and justify their extraordinary expenses mainly by appealing to elites egos. Well, hedge funds by and large do poorly. This is largely due to huge expenses. Add to that the incentives managers have to take huge risks: the managers often get 20% of extraordinary gains and if they lose, well you lose your money. These incentives to take huge risks do mean a few hedge funds do spectacularly well each year (of course more usually do spectacularly poorly over time).
Warren Buffett knew this and wagered a long term investment in a low cost Vanguard S&P 500 Index fund would beat a hedge fund over the long term.
Buffett Seizes Lead in Bet on Stocks Beating Hedge Funds
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Buffett’s argument, like the large pension funds, is that funds of hedge funds cost too much, according to a statement he posted on longbets.org, a website backed by the nonprofit Long Now Foundation that fosters “long-term thinking.” In addition to the 2 percent management fee and 20 percent performance fee that hedge funds typically charge, the funds of funds add another layer of fees, on average 1.25 percent of assets and 7.5 percent of any gains, according to data compiled by Bloomberg.
There may be many nice things about being in the 1% of the USA (being in 1% of the World is something more people in the USA should realize they are – more than 50% of the USA is in the 1% of everyone) but investing in hedge funds is mainly fools helping make a few more of the 1% by paying huge fees for lousy investments. Yes a few hedge funds will manage to do well. As would a few monkey’s throwing darts at a page of investments each quarter. The odds of picking a hedge fund for a long period of time that does so well the huge fees are justified are not great. Missing out on this investment option is not one you should feel sad about.
Related: Is the Stock Market Efficient? – Investment Risk Matters Most as Part of a Portfolio, Rather than in Isolation – 12 Stocks for 10 Years: January 2012 Update
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