Hedge funds seek to pay the managers extremely well and claim to justify enormous paydays with claims of superior returns. Markets provide lots of volatility from which lots of different performances will result. Claiming the random variation that resulted in the superior performance of there portfolio as evidence the deserve to take huge payments for themselves from the current returns is not sensible. But plenty of rich people fall for it.
As I have written before: Avoiding Hedge Fund Investments is One of the Benefits of Being in the 99%.
This is pretty well understood by most knowledgeable investors, financial planners and investing experts. But funds that charge huge fees continue to get away with it. If you are smart you will avoid them. A few simple investing rules get you well into the top 10% of investors
- seek low fees
- diversify – pay attention to risk of portfolio overall
- limit trading (low turnover)
- use tax advantage accounts wisely (in the USA 401(k)s and IRAs)
From a personal finance perspective, saving money is a key. Most people fail at being decent investors before they even get a chance to invest by spending more than they can afford and failing to save, and even worse going into debt (other than to some extent for college education and house). Consistently putting aside 10-20% of your income and investing wisely will put you in good shape over the long term.
Warren Buffett put his money (a tiny bit for him, just $1 million) on the idea that hedge funds can’t outperform the market given the huge fees they charge. After 6 years he is well up on his bet with his pick (Vanguard S&P 500 index soundly beating a portfolio of hedge funds selected by the opponent in the bet).
I do wonder at what point the huge amount of index investing creates opportunities that can be exploited profitably. I actually think that point has been passed. The question now is can you profitably and reliably find active investing managers that are wise and charge relatively low fees? Passive investing may now account for over 60% of investments in the market.
Also in certain market environments where the market is likely to ignore useful data (bubbles or fads) or where data is questionable and smart digging can provide useful and profitable insight (China may fit this idea now – I pay for actively managed Templeton developing market funds and have for 20 years, I also have Vanguard developing market index type fund – VWO). I think most investors should primarily use index funds (REITs, etc.) but I think the prospects for investors picking their own stocks may be better as more investing is based solely on index funds mass buying and selling.
I am worried about the price level of the overall market now. I am less worried about some stocks; this means I am more comfortable holding Apple, Google, Toyota, Abbie etc. (not so much – Amazon) than I am the S&P 500 right now.
Related: Trying to Beat the Stock Market – Lazy Golfer Portfolio Allocation