Stocktake: No hedge funds, no cry

Only wealthy investors should give in to the allure of hedge funds

Hedge funds are the preserve of wealthy investors. Small investors “may feel left out” but it’s a blessing in disguise.

So says finance professor Javier Estrada in a recent paper, noting that a bog standard 60:40 US stock/bonds portfolio would have beaten the average hedge fund in terms of return and risk-adjusted return over the past 10, 15 and 20 years.

Similar results are found if one examines a global stock/bond portfolio.

As for offering protection in turbulent times, you’d have fared much better and at a much lower cost by buying gold over hedge funds.


Nevertheless, the allure of hedge funds persists. One explanation, suggests Estrada, is that investors are blinded by stories of managers buying penthouses in Manhattan.

However, their wealth comes from fees, not from outsized returns. Assuming a 10 per cent annual return and a 30-year holding period, a fee of 2 per cent of the assets and 20 per cent of the returns would reduce the value of an investment by nearly 70 per cent.

The title of the study says it all: No Hedge Funds, No Cry.