Hedge Fund Expected Returns Are Fabricated Sales Tools

Hedge-Fund Mediocrity Is the Best Magic Trick
Never have so many investors paid so much for such uninspiring returns.
Bloomberg, February 15, 2018




Hedge funds have accumulated $3 trillion, with a substantial portion of it coming from public pensions. That these funds don’t deliver outperformance is almost beside the point. What they are selling is an inflated estimate of expected returns. This serves a crucial purpose for elected officials, letting them lower the annual contributions states and municipalities must make to the pension plans for government employees.

It is a dodge that everyone goes along with. When the bill comes due in a few decades, this will cost taxpayers a bundle.

It really is one of the more astounding market inefficiencies that so much money has been allocated to hedge funds by pension plans, not to mention university endowments and other institutions. I have no issue with those funds that have consistently beaten a simple investment mix of 60 percent broad equity indexes and 40 percent in bond funds. It’s the rest of group that is so problematic. In much the same way that the world’s worst index fund manages to stay in business, it is a challenge to explain why so much money has found its way to so much mediocre performance. Behavioral explanations can only go so far.

A recent Bloomberg Businessweek column looked at this issue. The conclusion: The investment managers often share their lofty fees (traditionally 2 percent of assets under management plus 20 percent of any gains) with placement agents who hawk the hedge funds, especially to pension funds. Some states have banned their pension plans from using the agents, but not enough of them have done so . . .


Continues here: Hedge-Fund Mediocrity Is the Best Magic Trick