Discover more from Overcoming Bias
A standard result in finance is that investment advisors and actively managed mutual funds tend to lose (risk-adjusted) money relative to simple "take the average" investment strategies. The July 2 New Yorker tells that hedge funds are no exception:
Unlike banks and brokerage firms, hedge funds are largely unregulated … Typically, hedge-fund managers charge their clients a management fee equal to two per cent of the amount they invest, plus twenty per cent of any profits that the fund generates. …
A [2003] study …compared the fee-adjusted returns of seventy-seven hedge funds between 1990 and 2000 with the returns generated by a market benchmark that had a similar risk profile. Seventy-two of the funds – more than ninety per cent – failed to outperform their benchmarks. … A larger study … examined more than nineteen hundred funds. … Only eighteen per cent of the funds outperformed their benchmarks, …..
[Worse,] many published estimates of hedge-fund returns are misleading. … [since] funds tend to exaggerate how well they performed in the past, and that those which perform badly often close and disappear from databases, leaving a biased sample. …. between 1996 and 2003 hedge funds made an average return of 9.32 per cent, significantly less than the 13.74-per-cent average return of funds included in the published databases.
The article also discusses how simple computer programs can "generate returns with the same, and often better, risk-return properties as hedge funds … but without the massive fees."
Just Take The Average
Dennis-
The great majority of investors are not smart and just dump money in SEPs, 401Ks, etc, and would never see a hedge fund except indirectly. The greatest quantity of invested funds is owned by people or nonprofit trusts who are not necessarily smart investors, but hire people who are. Bringing this round to the blog-topic, those financial advisors are sympathetic to large fees, because they also charge large fees and a round of recriminations over fees would be unseemly to both.
I doubt you'd see economic professors telling their own employer school that the stipend/fee demanded by a visiting professor is too high.
There is some herd mentality to accepting such fees, too (similar to the article you cited that talks of herd mentality in overpricing stock). And a bias that afflicts those who think a car is great BECAUSE it costs $250,000.
Henry Blodget's warnings about the rapacity of Wall Street are well-taken, but any investor worth his salt is quite aware of fees and performance already. And for those who believe in the Efficient Market Hypothesis and/or can't see what shares (i.e. an ownership stake) in a publicly-traded company are really worth, I highly recommend an essay by a certain fairly-successful investor. (Hint: his initials are WB.) The Superinvestors of Graham-and-Doddsville: http://www1.gsb.columbia.ed...