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Brett Arends's ROI

June 12, 2021, 4:01 p.m. EDT

Public pensions lose on hedge funds — again

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By Brett Arends

One of these days I’m going to write about a bunch of retirees and future retirees who have just made a ton of extra money thanks to the financial brilliance of elite, exclusive, high-fee hedge funds.

Today, however, is not that day.

Instead, here comes more news about a public pension fund allegedly missing out on billions of dollars because of hedge funds and other high-fee funds.

And the news that retirement systems and other institutional investors continue to pour yet more money into the hedge fund racket—excuse me, “industry.“

Oh, and reports that the industry is allegedly posting great returns thanks to the reopening of the economy.


Here are the facts, although I don’t expect them to break through the Reality Distortion Field apparently surrounding the folks who keep investing in hedge funds.

Exclusive hedge funds that involve complicated and exotic financial maneuvers are performing worse this year than a basic portfolio involving five, or even two, Vanguard funds that anyone can buy.

And this was true last year. And the year before that. And over the last five years. And over the last 10.

And that’s true even if we rely blindly on the hedge fund industry’s own data—a debatable move given the industry’s disclosures.

Check out the simple chart above.

On the left is the total return you’d have made over the past 10 years if you’d invested in Hedge Fund Research’s ”HFRI Asset-Weighted Composite Index“—the most widely used basic “index” of hedge fund returns.

The bar in the middle shows what you’d have made if you’d invested instead in a basic portfolio of five Vanguard (or comparable) index funds: Vanguard Total (U.S.) Stock Market Index Fund /zigman2/quotes/202876707/realtime VTSMX +0.34% , (International) Developed Markets Index Fund /zigman2/quotes/200109308/realtime VTMGX -0.07% , Emerging Markets Index Fund /zigman2/quotes/205715973/realtime VEIEX -0.51% , Inflation-Protected Securities Fund /zigman2/quotes/207983017/realtime VIPSX -0.16% , and Total Bond Market Index Fund /zigman2/quotes/210422528/realtime VBTLX -0.10% .

On the right is what you’d have if you’d gone for an even simpler two fund portfolio: Vanguard Total World Stock /zigman2/quotes/202040789/composite VT +0.06% , which is an exchange-traded fund, and the inflation-protected bond fund above.

These aren’t chosen with the benefit of hindsight. The standard benchmark investment portfolio has traditionally been 60% stocks, 40% bonds. So the two-fund portfolio is about as basic as you can get. As for the five fund portfolio? It’s the one I outlined 10 years and two months ago here , in another article about dismal hedge fund performance.

Meanwhile, so far in 2021, the hedge fund index is up just 6%. The five-fund portfolio is up 7% and the two-fund portfolio 8%.

The results are much the same even if you compare hedge funds to this much lower risk 10-asset portfolio, which I wrote about almost exactly seven years ago. Returns from that portfolio since then? About 55%. Hedge fund returns? Er…27%. Almost exactly half.

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