Hedge Funds Overcharge and Underperform
For example, according to Bloomberg, hedge funds rose 7% in 2010, while the S&P 500 was up 13%. Meanwhile, those hedge funds charge investors a 2% management fee and 20% of the profits. This compares to a sub 1% expense ratio for the typical S&P 500 index fund. So why do the wealthiest people invest in hedge funds? Maybe they’re smarter when it comes to making money than they are when investing it.
The performance of the hedge funds in 2010 was not monolithic. Some investment strategies performed better than others, according to Bloomberg. Here are five examples:
- Mortgage securities funds that seek to profit from price inefficiencies of mortgage securities were up 24% in 2010.
- Short funds (sell shares short): +7.5%
- Multi-strategy funds (use many strategies): +2.9%
- Macro funds (global themes or trends): +2.2%
- Statistical equity arbitrage (using quantitative analysis to find small profit opportunities): +0.4%
- David Tepper ($4 billion, 20%)
- George Soros ($3.3 billion, not available)
- James Simons ($2.5 billion, 15.9%)
- John Paulson ($2.3 billion, 16.9%)
- Steve Cohen ($1.5 billion, 11%)
I hope they have better luck in 2011 but I would bet the only ones really making out are the fund managers.