Have Hedge Funds Been a Disappointment? Cliff Asness Weighs In

Have Hedge Funds Been a Disappointment? Cliff Asness Weighs In

January 21, 2015 Uncategorized
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(Last Updated On: January 21, 2015)

Fortune published a great interview with Cliff Asness a few months ago, in which he breaks down hedge funds, recent performance, and why the critics are both right and also dead wrong:

I selected some quotes I found illuminating:

Have hedge funds been a disappointment? Only to people who believe that they should be fully invested in the stock market when the stock market is up, and fully out when the stock market is down. I’ve yet to find anyone who can do that. I’ve yet to actually find a hedge fund manager who claims to be able to that.

Asness highlights something we see on occasion–investors want assets that go up, but never come down. And as Asness points out, this is impossible!

Plenty of hedge funds charge too much. I think they should be fully hedged. I think that there’s no reason that they run to about 40% (what’s called) “net long,” meaning 40% exposed to the market, so you’re not getting as much diversification, and it effectively makes their fees even higher, because you’re paying 40% for something you really should go to my friend Jack Bogle and get for almost nothing.

Again, a basic point, but an important point–we need to focus on what we can get for free!

As always, Mr. Asness’s candor is refreshing.



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About the Author

David Foulke

Mr. Foulke is currently an owner/manager at Tradingfront, Inc., a white-label robo advisor platform. Previously he was a Managing Member of Alpha Architect, a quantitative asset manager. Prior to joining Alpha Architect, he was a Senior Vice President at Pardee Resources Company, a manager of natural resource assets, including investments in mineral rights, timber and renewables. He has also worked in investment banking and capital markets roles within the financial services industry, including at Houlihan Lokey, GE Capital, and Burnham Financial. He also founded two technology companies: E-lingo.com, an internet-based provider of automated translation services, and Stonelocator.com, an online wholesaler of stone and tile. Mr. Foulke received an M.B.A. from The Wharton School of the University of Pennsylvania, and an A.B. from Dartmouth College.

  • Spinoza500

    Obviously, there are some interesting hedge funds with value added strategies but in the vast majority of cases fees exceed alpha. What is remarkable is that analysts have successfully managed to convince a number of institutions to increase the use of hedge funds as part of their strategic asset allocation – often replacing bond allocation. If you simply quote hedge fund index data and run the numbers, then this argument can be made but only if you ignore:

    – massive survivorship bias distorting the indices
    – massive illiquidity risk
    – the lack of common risk return features making it sensible to talk of hedge funds across many strategies as one asset class.

    In practice, hedge fund allocations are frequently adopted to support implausible long term total return targets for a portfolio. The consultants and analysts concerned are often remarkably bright and decent people but have ended up in a position advocating hedge fund allocation despite in many cases believing in private that the sole beneficiaries of this approach will be hedge fund managers. Congratulations to Calpers for pointing out that the emperor has no clothes.