Much has been made about hedge funds’ failure to keep up with the major stock market benchmarks this year. But 2011 is merely the latest disappointment in a string of misses that stretches back nine years, according to one analysis of the hedge fund industry.
Money invested in hedge funds since 2003 would have generated a return of 18% through November, according to data compiled by Hedge Fund Research. That puts it far behind the Standard & Poor’s 500-stock index, which has generated returns of 29% over that same period, once dividends are factored in, according to Simon Lack of SL Advisors. The hedge fund underperformance is even starker when placed next to a small basket of investment grade corporate bonds, as measured by the Dow Jones Corporate Bond Index. That benchmark has gained 77% since 2003.
Factor in hedge fund mangers’ customary 2% management fee and a 20% cut in profits, and the gap widens even more.
So why do rich people keep pouring money into these sinkholes? I think it is because only rich people can invest in them. They create a feeling of being a wealthy insider, and everybody knows that rich insiders do better under capitalism than anyone else. That hedge funds are not subject to all the consumer protection regulations that govern mutual funds only increases the allure, especially among government-despising conservatives.
Really most of the financial services industry is a scam, delivering no added value at great cost. I keep wondering when the world will wise up to this.