It’s always fun to take a couple of swings at hedge funds (though it’s starting to feel like punching down lately).
It looks like the outflows from hedge funds will continue in the coming year. Both because of performance (according to a survey referenced in the article, only 3% of managers and investors thought that hedge funds beat their expectations), but also because people are starting to catch on that there’s nothing particularly special about the hedge fund structure. They’re just really expensive actively managed funds.
So why not switch to a less expensive (though still expensive) actively managed fund that doesn’t place all sorts of restrictions on you? Or even better, move to a passive vehicle like we’re seeing across the industry?
It also doesn’t help that Warren Buffett spent a fair chunk of his most recent annual letter whacking at hedge funds, too. And he’s more than happy to back up his rhetoric. We’re nine years into his ten-year bet against hedge funds.
Buffett publically offered a bet to bet any investment professional that they couldn’t pick a group of five hedge funds that would beat an S&P 500 index fund. Shockingly, only one manager, Ted Seides of Protégé Partners, actually took him up on the bet. Seides at least had the courage of his convictions, but it isn’t looking so good for him.
In his update, Buffet said, “The results for [hedge fund’s] investors were dismal – really dismal. And, alas, the huge fixed fees charged by all of the funds and funds-of-funds involved – fees that were totally unwarranted by performance – were such that their managers were showered with compensation over the nine years that have passed, as Gordon Gekko might have put it: ‘Fees never sleep.’”
It’s hard to put a much finer point on it than that.
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