Why hate hedge funds?
Hedge funds are hated by some. Why?
1. Most people fear anything outside their direct experience. They don't want to know their ancestors were apes or that the sun doesn't revolve around the earth. They also need to blame others when they lose money. According to them hedge funds have been the "cause" of every market downturn! The fact that each hedge fund trades differently, adds liquidity and is likely to be the BUYER of last resort is lost on them. Hedge funds represent change and they detest change. Hedge funds are disruptive to the long only crowd that has been such a failure in meeting investors' absolute return needs.
2. Hedge funds are the counterexample to the random walk and efficient markets. A disproven theory is not a hypothesis, strong, semistrong or weak. The outstanding performance of a small number of hedge funds could earlier be explained by statistical fluke - the millionth monkey beat the market. But now many hedge funds deliver absolute returns at LOWER risk than the market; a situation untenable in "classical" finance. The sustained success of hedge funds means the rubbish in economics courses must be removed. Teaching the Capital Asset Pricing Model CAPM to MBAs is like teaching the flat earth theory to geographers or creationism to biologists.
3. Some don't like the idea of expunging thousands of papers from academic journals, the revocation of "Nobel" prizes in Economic "sciences" or refunding the tuition fees of students that had their heads filled with absurdity. The hedge fund counterexample means the work of Paul Samuelson, Harry Markowitz, William Sharpe, Eugene Fama, Kenneth French and the Long-Term Capital Management geniuses - always losing money trading options but give them a Nobel anyway - is wrong. Easier to criticize hedge funds than admit to the fallen house of cards of rational agents and unbeatable markets. Paraphrasing, well-known hedge fund manager Warren Buffett once said he was glad random walk hubris was still taught as it provided new generations for him to arbitrage.
4. Advisors to investors get nice fees for not doing much other than recommending risky stock and bond portfolios. Many financial "planners" do not have the expertize to evaluate superior and safer alternatives. Do they have the best interests of their clients at heart if they continue solely with UNHEDGED portfolios of long only funds? Magazines carry advertisements from mutual funds but hedge funds can't buy commercials. What would patients think of a doctor who ignored new medicines or a lawyer who didn't know a new law? New ways of making money are worth looking at. A wealth manager who fails to recommend a SUBSTANTIAL portfolio allocation to good hedge funds is not doing a good job.
5. Envy. It is ok for movie stars and entrepreneurs to make large amounts of money but for some reason not hedge funds. Firstly hedge fund managers ARE entrepreneurs and if it is OK for Bill Gates to make $50 billion and the Google guys to make $12 billion for delivering products people need, what is wrong with entrepreneurial hedge fund managers making lesser amounts for also delivering what people need - RELIABLE ABSOLUTE RETURNS AT LOWER RISK.
6. Regulation. The "unregulated" hedge fund industry actually IS regulated. Hedge funds are not allowed to promote their business, allegedly to "protect" Mom and Pop but actually to protect "mutual" funds. If you were a slide-rule you wouldn't want computers available to the general public either. Pity the journalist trying to put together a balanced hedge fund article; they get inundated with on the record quotes from the anti hedge fund lobby and then a wall of silence from the hedge funds themselves because their lawyer advises against speaking to the media due to SEC rules. As for disclosure, professional hedge fund investors demand and receive more transparency.
1. Most people fear anything outside their direct experience. They don't want to know their ancestors were apes or that the sun doesn't revolve around the earth. They also need to blame others when they lose money. According to them hedge funds have been the "cause" of every market downturn! The fact that each hedge fund trades differently, adds liquidity and is likely to be the BUYER of last resort is lost on them. Hedge funds represent change and they detest change. Hedge funds are disruptive to the long only crowd that has been such a failure in meeting investors' absolute return needs.
2. Hedge funds are the counterexample to the random walk and efficient markets. A disproven theory is not a hypothesis, strong, semistrong or weak. The outstanding performance of a small number of hedge funds could earlier be explained by statistical fluke - the millionth monkey beat the market. But now many hedge funds deliver absolute returns at LOWER risk than the market; a situation untenable in "classical" finance. The sustained success of hedge funds means the rubbish in economics courses must be removed. Teaching the Capital Asset Pricing Model CAPM to MBAs is like teaching the flat earth theory to geographers or creationism to biologists.
3. Some don't like the idea of expunging thousands of papers from academic journals, the revocation of "Nobel" prizes in Economic "sciences" or refunding the tuition fees of students that had their heads filled with absurdity. The hedge fund counterexample means the work of Paul Samuelson, Harry Markowitz, William Sharpe, Eugene Fama, Kenneth French and the Long-Term Capital Management geniuses - always losing money trading options but give them a Nobel anyway - is wrong. Easier to criticize hedge funds than admit to the fallen house of cards of rational agents and unbeatable markets. Paraphrasing, well-known hedge fund manager Warren Buffett once said he was glad random walk hubris was still taught as it provided new generations for him to arbitrage.
4. Advisors to investors get nice fees for not doing much other than recommending risky stock and bond portfolios. Many financial "planners" do not have the expertize to evaluate superior and safer alternatives. Do they have the best interests of their clients at heart if they continue solely with UNHEDGED portfolios of long only funds? Magazines carry advertisements from mutual funds but hedge funds can't buy commercials. What would patients think of a doctor who ignored new medicines or a lawyer who didn't know a new law? New ways of making money are worth looking at. A wealth manager who fails to recommend a SUBSTANTIAL portfolio allocation to good hedge funds is not doing a good job.
5. Envy. It is ok for movie stars and entrepreneurs to make large amounts of money but for some reason not hedge funds. Firstly hedge fund managers ARE entrepreneurs and if it is OK for Bill Gates to make $50 billion and the Google guys to make $12 billion for delivering products people need, what is wrong with entrepreneurial hedge fund managers making lesser amounts for also delivering what people need - RELIABLE ABSOLUTE RETURNS AT LOWER RISK.
6. Regulation. The "unregulated" hedge fund industry actually IS regulated. Hedge funds are not allowed to promote their business, allegedly to "protect" Mom and Pop but actually to protect "mutual" funds. If you were a slide-rule you wouldn't want computers available to the general public either. Pity the journalist trying to put together a balanced hedge fund article; they get inundated with on the record quotes from the anti hedge fund lobby and then a wall of silence from the hedge funds themselves because their lawyer advises against speaking to the media due to SEC rules. As for disclosure, professional hedge fund investors demand and receive more transparency.
© posted by Hedge Fund on 8:47 PM
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