Robo-advisors are set to replace financial advisors in the same way that online banking is replacing bank tellers. This rapidly growing service offers many of the functions of a financial advisor, but at a fraction of the cost. By one estimate, robo-advisors will have $2.2 trillion in assets under management by 2020.
An enormous body of literature touts the benefits of investing in hedge funds. A typical analysis uses aggregate indices published by Hedge Fund Research, Morningstar and others to make their case. Investors can’t invest in hedge fund indices, however, and are thus unable to monetize the purported benefits of hedge funds.
The performance of hedge funds is one of the most written about topic in the financial media. Headlines herald each week's hedge fund performance compared to stocks, as if the information is actually useful for investors. The publication of hedge fund performance is dominated by hedge funds, their industry groups, and the "service providers" who depend on hedge funds for access and information.
As hedge funds returns have lagged the S&P500 index for seven straight years, the question arises as to whether or not hedge funds belong in an investment portfolio or earn their high fees. This is the first of three articles that addresses this issue. The present article reviews the narrative arguments presented by the hedge fund industry to rebut criticisms of hedge fund performance.
Hedge funds (along with liquid alternative investments) and smart beta funds have been among the fastest growing investment vehicles over the past few years. I believe that the reason for this growth is that they both appeal to the investors’ focus on factors or performance drivers rather than alpha or labels. More and more, investors view investments as a bundle of factors that are evaluated for their impact on the overall portfolio.
Justifying Hedge Fund Performance
A number of arguments have been put forward to explain (or justify) the poor performance of hedge funds. One such is the argument that the S&P is not a relevant benchmark for evaluating hedge funds because the latter's goal it precisely not to track the S&P. Rather, hedge funds seek to reap absolute returns or provide a superior risk-adjusted return. In more recent times, the justification for hedge funds' performance has been that their true benefit is not to outperform the S&P, but rather
JANUARY 28, 2016
One of the most controversial questions in the investment world is: why do hedge funds keep gaining assets when their performance over the past decade has been relatively poor compared to stocks? After all, hedge fund returns have lagged the S&P for the past 7 years; a period that covers a full business cycle.
While hedge fund fees have declined during the past several years, they are still remarkable for the fact that they have only come down marginally over a 30-year time period and that they are higher than almost any other fees charged for money management. How can we explain this phenomena?
When CalPERS, the country’s largest pension plan, decided to liquidate its hedge fund portfolio in 2014, there was an outpouring of predictions of a mass exodus of pension plans’ investments in hedge funds. The mass exit never occurred. In fact, pension plans continued to throw money at hedge funds at an increasing rate.
We all love a good story. Since we were infants, stories have been important in teaching us about the world. It turns out that we remember things more easily if they are in the form of a story or narrative than rather than as unconnected fragments of information. There seems to be a hardwired need that we have for imposing order and causality to both historical and future events.
About Ezra Zask
Ezra Zask has spent over 30 years in the finance and investment areas, providing research and consulting to investors and investment management companies. He has founded and managed a hedge fund, fund of funds and investment advisory firms, ans held senior positions in hedge funds and investment advisory firms. He has taught at Princeton and Yale graduate schools and written extensively including a best-selling book, All About Hedge Funds, Second Edition (McGraw Hill: 2013)