By Brett Arends
(Incidentally, if I wanted to use hindsight, I’d compare the hedge funds to a U.S.-only portfolio, because U.S. stocks have boomed this decade. So the Vanguard Balanced Index Fund VBINX , a one -fund portfolio that consists of 60% U.S. stocks and 40% U.S. bonds, has risen 160% in the past decade. That’s more than three times the returns you’d have earned from hedge funds.)
There’s no great mystery to this. Hedge funds typically charge about 2% annual fees, plus 20% of any profits.
I remember sitting down a decade ago and doing the math. I was visiting the hedge fund industry’s annual jamboree at the time— appropriately enough in Las Vegas , where the house always wins.
A fund’s investments have to beat the stock and bond markets by about 50% a year just to cover the vig.
Oh, and if a hedge fund actually knows how to do that—like Renaissance —why would they bother cutting you in anyway? They’d just invest their own money.
Hedge-fund managers make us, the middle-class American taxpayers, two-time suckers.
First they leech off us through the public-sector pension funds, which pour money into hedge funds year after year for no discernible reason. Most public pension funds are in the red, which means ultimately they’re going to be making up the difference by picking the pockets of you-know-who.
Then the hedge-fund managers barely even pay any tax on their loot either. Thanks to the ‘carried interest loophole,’ a legal tax treatment whose more accurate names would be unprintable, they pay very little tax down the road and almost nothing today.
You see how this works? They take our tax dollars, and they don’t even pay in. It’s like we’re an occupied country and we’re paying hedge-fund managers tribute.
The key thing to understand about hedge funds is that they are fabulous vehicles for making people rich — so long as you’re a fund manager, not an investor.
The problem isn’t that it’s impossible for hedge funds to beat the market. It’s that they can’t beat the market in aggregate, after fees. And, just as importantly, that any hedge funds which can beat the market after fees are not going to take outside money.
But hope springs eternal. As P.T. Barnum might have said, there’s a hedge-fund investor born every minute.