A Wealth of Common Sense: Margin of Too Much Safety

The data for 2024 is out. Most hedge funds managed to earn returns of around 15-20%. For most years, that’s a good return. But buying the stock market index would have generated returns of nearly 25%.

It’s just one more year of hedge funds generally underperforming the overall stock market. And that doesn’t even factor in costs. Hedge funds typically take 2% of assets and 20% of returns.

That fee remains much more expensive than the 0.1% fee that investors might face buying a market index fund.

With thousand of hedge funds still around today, their real issue is that these funds may be too hedged.

They simply have too much downside protection. While a hedged fund may fare better than stocks during a market meltdown, such meltdowns are rare.

Plus, many funds don’t really hedge intelligently. Some may look to short overpriced stocks and go long undervalued stocks. But overpriced stocks may be momentum and tech companies that could fare higher.

Meanwhile, most fund managers end up becoming large investors in the fund. As their wealth in the fund grows, so does their caution to protect what they do have.

Overall, hedge funds may sound like an intelligent investment for high net-worth investors. But their overreliance on safety ensures underperformance.

For the full details on the trouble with hedge funds, click here.