Why Do Rich People Love Hedge Funds?# Stock
m*h
1 楼
Carl Richards has a post over at the New York Times' Bucks blog in which he
puzzles over the enduring appeal of hedge funds, despite the fact that they
have historically underperformed the S&P 500. Why, he asks, are people
paying exorbitant fees to hedge-fund managers who don't even make money for
them?
Richards takes a stab at the answer in a few ways. First, he implies that
there's an element of groupthink in Hedgistan, with investors all chasing
increasingly complex hedge-fund strategies because "the more complicated and
secretive and exclusive it is, the better." He also gets at the false
correlation between exclusivity and superior returns: "People want to
believe there’s a better way of investing that’s only available to a
select few."
I think those are both true, to an extent. But I don't think it's correct to
draw the sweeping conclusion that rich people are dumb and desperate to get
richer, and therefore easily fooled by hedge-fund managers bearing
Powerpoint decks and sleek Brioni suits.
First, I question Richards's assumption that "people" — as in individual,
high-net-worth investors — are flooding into hedge funds unabated. Look at
this chart from a Citi report last year, for example, which shows that the
percentage of hedge-fund assets coming from individuals and family offices
is actually down since the crisis, while the amount of money hedge funds get
from institutional investors like pension funds and endowments has
overtaken it.
What this tells us is that the money flooding into the likes of Greenlight
Capital and Pershing Square and SAC Capital (well, until recently) is
increasingly coming from sources that are forced to invest in those firms.
If you're the chief investment officer of CalPERS, a huge California pension
fund, and your hedge-fund allocation is 2 percent — meaning that your
board has said that 2 percent of your total assets must be invested in hedge
funds — you don't have a choice to invest in other stuff instead. You can
pick one manager over another, but you're not "choosing" to be in hedge
funds as a category, except at the yearly meetings where you and other board
members shift around the fund's allocations. (Of course, these allocations
rest on their own tenuous logic. But that's another post.)
And contra Richards, who believes that investors are happy to be "paying
through the nose for the privilege of investing in hedge funds," I think it'
s clear that most hedge-fund investors are averse to huge fees and are using
their leverage to knock them down. Look at the way Réal Desrochers of
CalPERS has used the huge size of his fund to hammer out special fee-
lowering arrangements with his private-equity managers. This kind of thing
is becoming more prevalent among institutional investors as hedge funds
continue to underperform, and it shows that most of the people who invest in
hedge funds do care how much they're being charged for the privilege, and
are actively trying to bring those fees down in line with performance.
Individuals seem to care about fees, too, a phenomenon best evidenced by the
way that the fund-of-funds — a horrible, fee-heavy way of investing in a
fund that then invests in other hedge funds, taking its own fees in addition
to the ones the hedge funds charge — is mostly dying out. This Citi chart
(which Felix Salmon pulled last year) shows the declining popularity of the
fund-of-funds, and perhaps implies that investors are wising up:
So, to answer Richards's question ("Why do you think people still invest in
hedge funds?"), I think you have, on one hand, a bunch of pension funds and
sovereign wealth funds that are duty-bound to make a certain amount of money
for their members, and would rather use a single-digit fraction of their
cash pile to swing for the fences in Hedgistan (investing in a fund that
might gain 80 percent in a year) than eke out 5 or 6 percent gains in plain-
vanilla funds. I think you have, on the other hand, a set of high-net-worth
individuals who want to invest in hedge funds because it makes them feel
special and exclusive and gets them invited to cool parties, but are
increasingly trying to scale back their obviously stupid investments (funds-
of-funds) in favor of slightly less stupid investments.
There's another obvious part of the hedge-fund equation, which is that hedge
-fund managers are — on the whole — pretty smart, and really, really, good
at selling you their ideas. Look, for example, at the way Ray Dalio of
Bridgewater Associates explains the concept of "risk parity," which he says
allow Bridgewater's investors to use leveraged bond derivatives to offset
equities losses. It's very convincing, and even though I don't know what
risk parity is or how it functions, if I'm the CIO of a midsize pension fund
, I'm inclined to give my money to Dalio even if I don't fully understand
what he's going to do with it. Investing at the scale of a pension fund is a
division of labor, and if I can't fully get my head around Sector X or Bond
Derivative Y, I'm inclined to pass that responsibility off to someone who
does understand it deeply.
Now, this approach to portfolio management contains flawed logic all its own
. But it's hardly as simple as wanting to feel like a VIP at all costs.
puzzles over the enduring appeal of hedge funds, despite the fact that they
have historically underperformed the S&P 500. Why, he asks, are people
paying exorbitant fees to hedge-fund managers who don't even make money for
them?
Richards takes a stab at the answer in a few ways. First, he implies that
there's an element of groupthink in Hedgistan, with investors all chasing
increasingly complex hedge-fund strategies because "the more complicated and
secretive and exclusive it is, the better." He also gets at the false
correlation between exclusivity and superior returns: "People want to
believe there’s a better way of investing that’s only available to a
select few."
I think those are both true, to an extent. But I don't think it's correct to
draw the sweeping conclusion that rich people are dumb and desperate to get
richer, and therefore easily fooled by hedge-fund managers bearing
Powerpoint decks and sleek Brioni suits.
First, I question Richards's assumption that "people" — as in individual,
high-net-worth investors — are flooding into hedge funds unabated. Look at
this chart from a Citi report last year, for example, which shows that the
percentage of hedge-fund assets coming from individuals and family offices
is actually down since the crisis, while the amount of money hedge funds get
from institutional investors like pension funds and endowments has
overtaken it.
What this tells us is that the money flooding into the likes of Greenlight
Capital and Pershing Square and SAC Capital (well, until recently) is
increasingly coming from sources that are forced to invest in those firms.
If you're the chief investment officer of CalPERS, a huge California pension
fund, and your hedge-fund allocation is 2 percent — meaning that your
board has said that 2 percent of your total assets must be invested in hedge
funds — you don't have a choice to invest in other stuff instead. You can
pick one manager over another, but you're not "choosing" to be in hedge
funds as a category, except at the yearly meetings where you and other board
members shift around the fund's allocations. (Of course, these allocations
rest on their own tenuous logic. But that's another post.)
And contra Richards, who believes that investors are happy to be "paying
through the nose for the privilege of investing in hedge funds," I think it'
s clear that most hedge-fund investors are averse to huge fees and are using
their leverage to knock them down. Look at the way Réal Desrochers of
CalPERS has used the huge size of his fund to hammer out special fee-
lowering arrangements with his private-equity managers. This kind of thing
is becoming more prevalent among institutional investors as hedge funds
continue to underperform, and it shows that most of the people who invest in
hedge funds do care how much they're being charged for the privilege, and
are actively trying to bring those fees down in line with performance.
Individuals seem to care about fees, too, a phenomenon best evidenced by the
way that the fund-of-funds — a horrible, fee-heavy way of investing in a
fund that then invests in other hedge funds, taking its own fees in addition
to the ones the hedge funds charge — is mostly dying out. This Citi chart
(which Felix Salmon pulled last year) shows the declining popularity of the
fund-of-funds, and perhaps implies that investors are wising up:
So, to answer Richards's question ("Why do you think people still invest in
hedge funds?"), I think you have, on one hand, a bunch of pension funds and
sovereign wealth funds that are duty-bound to make a certain amount of money
for their members, and would rather use a single-digit fraction of their
cash pile to swing for the fences in Hedgistan (investing in a fund that
might gain 80 percent in a year) than eke out 5 or 6 percent gains in plain-
vanilla funds. I think you have, on the other hand, a set of high-net-worth
individuals who want to invest in hedge funds because it makes them feel
special and exclusive and gets them invited to cool parties, but are
increasingly trying to scale back their obviously stupid investments (funds-
of-funds) in favor of slightly less stupid investments.
There's another obvious part of the hedge-fund equation, which is that hedge
-fund managers are — on the whole — pretty smart, and really, really, good
at selling you their ideas. Look, for example, at the way Ray Dalio of
Bridgewater Associates explains the concept of "risk parity," which he says
allow Bridgewater's investors to use leveraged bond derivatives to offset
equities losses. It's very convincing, and even though I don't know what
risk parity is or how it functions, if I'm the CIO of a midsize pension fund
, I'm inclined to give my money to Dalio even if I don't fully understand
what he's going to do with it. Investing at the scale of a pension fund is a
division of labor, and if I can't fully get my head around Sector X or Bond
Derivative Y, I'm inclined to pass that responsibility off to someone who
does understand it deeply.
Now, this approach to portfolio management contains flawed logic all its own
. But it's hardly as simple as wanting to feel like a VIP at all costs.
