Here is a question asked to members of our Pension Play Pen by Alan Miller. It’s a long question so I’ve broken it down a bit- my answers at the bottom!
When you consider predictions (eg LBS’s Dimson & Marsh) that the future growth in equities may well be just 5% pa.
(check out the Credit Suisse 2013 yearbook)
…..and that an average hedge fund is effectively typically effectively about 60% long
(that means that it expects to get 60% of its return from said equities)
once you put in 2 lots of high charges as per a traditional fund of fund structure, it should not be such a surprise why you would be much better off investing in a dynamic multi-asset fund instead.
Hedge funds typically charge 2% of the contributions and 20% of the return, a more conventional multi-asset fund is unlikely to charge more than 1% overall – a lot less (in a low return environment this makes a big difference).
No “seemingly” about it. You may as well ask why a bookmaker reccomends you bet on a horse with three legs. The answer is that it’s in their interets to do so.
– when I started managing a hedge fund in 1997 we had much higher overall market returns and more pricing anomalies
Hard to dispute that returns were higher in the 1990s and that information was not so available as today.
but very few pension funds or consultants were the slightest interested. Why are the same consultants so interested now? Answers please.
The pension mentality replies.
- Herd mentality- consultants move as herds of cows, you can’t move one till they are all convinced
- By the time you’ve convinced all the cows, someone else has eaten all the best grass
- Hedge fund managers are the cows who left the herd to eat all the best grass
- The milk we get from the cows in the herd is thin stuff as it has little nutrition and it costs us a fortune because the fat cows have creamed it!
If you are dumb enough to listen to follow consultants who are in the herd , you are not a good purchaser. If you don’t know what you’re buying, don’t buy, invest in things you do understand.
- Hedge Fund-Blacklist Urging Pension Funds to Stay Away: Icahn, Cohen, Tepper and Loeb All On It (insidermonkey.com)
- Teachers Union’s Hedge Fund Enemy List (blogs.wsj.com)
- Smart Beta Investing Now More Attractive To Pension Funds? (valuewalk.com)
- PlayPen votes for target date funds in action-packed lunch (henrytapper.com)