- From 1/94-10/2012, buying and holding the 10-year treasury bond has outperformed hedges funds:
- Better risk-adjusted performance
- Enhanced diversification benefits
- …but hedge funds have been better able to capture up markets and the long-bond was on a tear!
- 60/40 slightly loses out to hedge funds on a risk-adjusted basis.
- Hedge funds start off with a bang, but end with a whimper over the last 5 years:
- .99% CAGR; -22% max drawdown; and a 83% correlation with the S&P 500
- Alpha, or value-add after controlling for common risk factors, was ~0%!
- Paying a 2% management fee and 20% of profits is akin to financial suicide in most situations.
- §Due diligence, monitoring, audit, fund admin, expected fraud, and lack of liquidity increase costs.
- §The high-cost infrastructure of hedge funds (i.e., comingled LP structures) is not sustainable.
When assessing your investment management relationship, utilize this simple formula to determine your expected performance:
Where, E(r) is the expected return, R(m) is the return on the broad market, Y(n) is the number of yachts the investment manager owns, H(n) is the number of vacation homes, and Fees represent the annual fees (both management and performance fees). Here is an example: R(m) = 10%, the manager has 5 yachts, 1 vacation home, and fees are 2%. The expected return would be .10-.1*5-.1*1-.02= -52% / year. Patent Pending.