This is a follow-up to “Hedge Funds Aren’t Supposed To Beat The Market”, because I got a lot of smart feedback. I don’t think I was entirely wrong, but I was less right than I guessed I was.
Reddit user sailfx had this to say:
“There are thousands of hedge funds with all types of capital requirements, strategies, and performance metrics. It is a largely unregulated industry and lumping the most popular multi-billion dollar funds together and then making blanket claims about ‘hedge funds’ in general is entirely unfactual. […] To be fair, it is popular opinion and you aren’t doing anything that many other people already do. Even Buffet and Seides are doing it. But that is a common problem with long-term investors and wealth managers, they tend to ignore all other forms of investing/trading and market participation until it fits their narrative. Always keep in mind, these people are in the business of selling themselves.”
Reddit user verik pointed out:
“Investing in a [hedge] fund is just an allocation of wealth that you did not want to be correlated with the rest of your broad market exposure. […] This obviously developed through the years as strategies became more complex however the name remained the same. Someone might invest in a global macro hedge fund to hedge their exposure to large cap domestics, etc. […] The word hedge in the name has nothing to do with the specific strategy of the funds assets and everything to do with the fact that the reason you allocate to one is to hedge your other asset allocation.”
Reddit user dogwelder chimed in:
“This makes no sense. Hedge funds don’t necessarily hedge at all; they might take any kind of strategy or risk. Seides does in fact argue hedge funds will beat the market, if his ten-year bet is any indication. And the conclusion claims the real benefit of investing in a hedge fund is you can pull your money out whenever you want… what? Most investors are bound by one or two-year lockup periods, plus redemption notice periods lasting weeks or months. How does that hedge liquidity risk better than an index fund?”
I want to push back on part of that — Seides doesn’t argue that all hedge funds will beat the market; he argues that the best hedge funds will beat the market. While that’s probably true, he apparently can’t pick ’em.
My savvy friend Gerald Leung also commented at length on Facebook. Here’s an excerpt:
“The purpose of hedge funds is to manage risk in investment. But that in itself is just a technique, one that could be used for the purpose of ‘beat the market’ (in regards to index funds, a growth purpose) or for the purpose of ‘make money consistently regardless of the market’ (a stable income purpose). And there’re hedge funds that do both of these as well as many other purposes. […] Likewise, funds, any kind of funds be they index funds, mutual funds, investment trusts, hedge funds, are intended to just make money. And that’s a very broad range of possibilities […] The main thing is that hedge funds have fewer restrictions and thus a wider range in whatever they decide their investment purpose to be, be it growth or income or any degree in between.”
Fair enough. Thanks @ everyone for weighing in!