Can a hedge fund make your money prosper?

smart money


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).

Why then (seemingly) do so many pension fund consultants recommend hedge funds or even worse funds of hedge funds?

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.

  1. Herd mentality- consultants move as herds of cows, you can’t move one till they are all convinced
  2. By the time you’ve convinced all the cows, someone else has eaten all the best grass
  3. Hedge fund managers are the cows who left the herd to eat all the best grass
  4. 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.

2013-01-26 11.30.07

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to Can a hedge fund make your money prosper?

  1. Pingback: All that glitters does not lure – thoughts on DC default funds. | The Vision of the Pension Plowman

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  3. Elliot Carol says:

    After reading this post i found that your way of conveying message is very impressive .As well as it is very informative topic for me because i also want to invest in hedge fund. Great job and keep it us.Feel free to update us form this type of post in future.

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