This isn’t new in the world of high finance. Investors pay a lot of money to participate in hedge funds. Ironically, this is seemingly the smart money. Only it isn’t. The broader market, as represented by the S & P 500 Index, has doubled the rate of return of hedge funds, 6% to 3%. Again.
Earlier this summer, some investors said enough is enough and began to complain loudly about what they considered excessive fees and charges. The standard has been an annual charge of 2% on assets held plus 20% of the return. That is, 20% of a positive return. You won’t see a hedge fund ante up 20% of a loss which they caused. This is great work if you can find it.
I have to admit when I read about investors complaining about hedge fund fees, I wonder how these folks got their money in the first place. Here’s the thing. S & P 500 Index funds have consistently outperformed highly managed funds throughout the years. In addition, as an investor, you’re paying about a tenth of one percent to own these funds. Compare this with the 2% hedge funds charge you to underperform an index fund. You do the math: .01% or 2%? Oops, I almost forgot. You also get to pay 20% vig on any return on your investment.
This hedge fund situation is all about psychology; how some people self-justify by paying more. In short, just how unbelievably stupid would they have to admit they are without self-justification. I guess we all possess some of this dysfunction. But really wealthy people usually get to surround themselves with their own narrative, no matter how much a fantasy, and with enablers on the gravy train. And this explains why hedge funds are still in business, though nowhere near as strong as they once were. So if you’re the small investor dutifully making periodic contributions to an index fund, pat yourself on the back and pity the rich guys in their hedge funds. But not too much.