Hedging my Hedge Fund Comment
#in At Starbucks this morning, I noticed they are selling an album by Seal. When's the last time Seal had an album out, 15 years ago? No offense Seal, but I thought you were polar bear meat by now. So, how convenient then that only days earlier I read Heidi Klum and Seal are getting a divorce. Hmmm. I wonder if they will reconcile once enough people have downloaded his songs?
The more I thought about it, the more I decided to modify yesterday's post which centered on a quote from a book about hedge funds that was reviewed by The Wall Street Journal.
The quote was from The Hedge Fund Mirage by Simon Lack:
“If all the money that’s ever been invested in hedge funds had been put in Treasury bills instead, the results would have been twice as good”
The quote really struck me, as I'm sure it did other WSJ readers, because it seems so shocking. You start thinking to yourself, "See all those supposed stud horses who call themselves hedge fund managers? They're really just very mediocre at best." But the quote is taken from a book review, which is taken from a book, which I didn't actually read.
It's a stunning quote. But with the additional clarity of another day I decided to ask some questions:
1. How does he know the performances of hedge funds? They are not exactly the pinnacles of disclosure - which is why they're attractive to many investors who like things on the secretive side. You're likely to only hear about the big successes or the big failures.
2. Is it really that shocking that Treasuries have outperformed hedge funds? The Treasury market has been in an incredible bull market - up 30% last year alone. And we don't really know how far back the book goes in its analysis.
3. Of course, if you take the sum total of the hedge fund world, the performance is going to be mediocre! It seems obvious when you think about it. If you take the sum total of results for all baseball teams in the 2011 season last year, guess what? They had a combined winning percentage of .500! Only 8 teams went to the playoffs and only one has a World Series trophy. That hedge funds follow the Pareto Principle should be no shock. 80% of the profits go to 20% of the managers, I'm sure.
4. Not all hedge funds are established with the goal of spanking the market. Some are focused simply on wealth preservation - focusing on generating good returns in down markets while offering little upside when markets are booming. Hence, the term "hedge".
Before you, me, or The Wall Street Journal starts getting a woody about some seemingly controversial quote, we should all ask ourselves the rationale that lies behind the purported shock factor that sells books, newspapers, and clicks.
