You’d think it would be hard to find much humorous in the kind of year hedge funds have had – down 8.5% for the year in their second worst performance in history. But there can be, depending on your perspective.
When I summarize my book, The Hedge Fund Mirage with the simple explanation that all the money ever invested in hedge funds would have been better off in treasury bills, I elicit a variety of responses. Rather like the concentric circles emanating from the point at which a tossed pebble hits the water, how people feel about this depends on how close they are to impact.
People I know in the hedge fund business almost invariably note that they’re not surprised. They may not have done the Math as I have to actually calculate the IRR of the industry, or examined the impact of fees on returns, but they do at some visceral level comprehend that it’s been a better ride for the managers of hedge funds than their clients. One individual who knows the numbers as well as most responded, “OMG, you’ve written THAT book?” But generally, the industry is not shocked by the result. That itself may be shocking.
One step farther removed are people who one might classify as financially sophisticated but not directly involved in hedge funds. This group includes professionals such as doctors, lawyers, accountants and other successful business people. They may serve on non-profit boards or investment committees, are in many cases wealthy enough to qualify as hedge fund clients and are reasonably in touch with the investment landscape. Their reaction is the most understandable, and a combination of shock and disappointment typically follow. They may be thinking back to investment committee meetings at which a consultant has promoted hedge funds for their non-profit’s investment portfolio. Or they may be hedge fund clients themselves through some helpful private bank. But they are genuinely dismayed at the result.
But most interesting is the response from those farthest from the center. Call them the 99%. Regular people that you might run into at Starbucks in the morning. Teachers, nurses, local town employees, individuals whose only knowledge about hedge funds is drawn from what they see on TV and who can only dream of the wealth that their qualified clients claim. If this group has any savings they’re largely in a 401K or other qualified retirement plan, and hedge funds are that mysterious but unbelievably lucrative area of Wall Street that’s way out of reach. These people have never met a hedge fund manager. And how do they feel about learning that investors should have been in treasury bills? They laugh. Without exception. The 1% (which is after all where hedge fund clients are to be found) may not pay enough in taxes and have enjoyed most of the benefits of economic growth over the past 30 years, but this is one place where the 99% have probably done better than the 1%.
Even if the un-invested spent their money rather than saving it, they probably got more out of it than the less-than-treasury-bills return earned by those closer to the center. It’s a satisfying feeling. Chuckles, smiles, laughter and guffaws quickly follow as the realization dawns that those with the fewest financial problems made at least one wrong move. In one arena, the 99% have outwitted the 1%. Maybe not intentionally, but that doesn’t matter. As Basil Fawlty crowed in one memorable episode (“Communications Problems”) “…for once in my life I’m actually ahead.” Of course, he wasn’t as became clear moments later, but that’s another story. For 99% (and I must admit that I probably belong in the 1%) hedge funds can be funny, and everyone deserves a good laugh from time to time.
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