Wednesday, January 31, 2007

Are Hedge Funds Now Worthless on Average?

Provocative post title, hehe :-)) I was doing some financial reviews and saw that my core indexed holdings returned 17.1% in 2006. I call them the "Krypto Fund" after my dog, Krypto, who is paid dog biscuits to push the key on my keyboard to do the asset reallocation. The Krypto Fund excludes all my active trading, long-term "alpha" stocks & my commodity trading returns; it's purely diversified index funds and gold & silver. The CS/Tremont Hedge Fund Index showed a return of 13.86% for 2006 - not so good versus the Krypto Fund. The difference between the Krypto Fund return and the hedge fund index return is accounted for the huge fees their management slurps down. This isn't really surprising since the huge number of hedge funds and their trillions really can't beat the averages anymore - they are part of the averages. They just churn & churn & feed at the trough. Spare me the comments how SAC & some others are super - no doubt they are. So was Peter Lynch in the mutual fund universe. Superstars in investing, like supernovae in the universe, do exist, but they are very few and scattered sparsely around in space & time. QED.


Bud said...

Am i understanding you correctly Bunkerman? You are comparing the performance numbers of the krypto fund ( well done by the way!) against the overall hedge fund industry? That is like me comparing my batting average in little league to the averages in the majors. There are good hedge funds and bad ones. The "average" includes them all. As an investor i would be looking for the best manager. Market forces eventually take care of the bad ones.

Bunkerman said...

I'm not sure you do understand, Bud. I'll write more about the Krypto Fund later, but it just uses global diversified index funds plus gold & silver in a simple asset allocation model - sort of like a benchmark global index. If hedge funds "on average" can't beat that benchmark, they provide no value on average. The problem with trying to pick the best manager out of thousands is the same as trying to pick the best mutual fund out of thousands or trying to pick the best stock out of thousands. Most would get better returns indexing most of a portfolio and concentrating on picking some stocks if you can, rather than try to pick a hedge fund manager. Few have David Swensen's ability or access - that's what he says, by the way.