Businessweek has put out a quite memorable story on the decline of hedge funds. The story, and a very good response, are worth a read. Even if you don’t pay much attention to that sector of finance a whole lot.
Why do I care? Well, I’ve never understood hedge funds. At all. They are terrible as long-term investment vehicles, which is really the only kind of investment vehicle you should be interested in unless you invest to gamble. What is important is low fees, and hedge fund fees are ridiculous: typically 2% plus 20% of profits annually. Good work if you can get it, but not so good if you are paying for it. That’s why I choose low-fee funds, trade rarely, rebalance as necessary, and consequently (according to my hated finance software) I get an IRR of about 13.5%. Similar data for hedge funds is hard to come by, but let’s go with this internet’s estimate of 6%. That’s insane! Who would do that?
The answer comes in that response piece: much like luxury cars or ridiculously large houses, apparently some people see being in a hedge fund as a status symbol. To wit:
10. Not every fund investment needs to be about performance. Some people just like knowing the smartest, slickest guy in the game is running their money and the results are an afterthought. Some people like the quarterly letters or the ability to tell their golf buddies “I’m with Einhorn.” You will see this when the advertising begins, by the way. It will be very much about aspirational branding and lifestyle. This will be image advertising – think Calvin Klein’s Obsession, not “Four Suits for Four Dollars at Joseph A Banks!” And what’s wrong with that?
And with that, the light bulb finally went on. It’s yet another tribal, in-group/out-group thing. Those who care about maximizing returns would never invest in hedge funds, but they also would never buy five houses and drive Ferraris. Those who want to accumulate and keep wealth do other things.
I’m not sure what I think about hedge funds as yet another luxury good, especially now that they can advertise to everybody, but at least it makes a bit more sense to me now.