Much in recent press arguing against hedge funds. Probably related to news of another large pension fund divesting completely. Plenty of vitriol around; a good summary of why not to invest in HFs from Barry Ritholtz is here, which further sources material from FT regarding ‘zombie funds’.
Let me highlight a couple reasons I’m still happy to invest in hedge funds:
- Problem with averages + performance persistence = opportunities. I recently wrote about how alternative asset managers (including HFs) show much more persistence in returns, unlike conventional asset managers. Thus, as often thrown in as a throwaway comment in the articles above, there are managers out there which consistently beat the averages to provide attractive returns. Unlike picking the best-performing long-only equity manager, hedge fund managers tend to show more consistent outperformance.
- Risk premium diversification, at needed risk level. Though most articles focus on how not diversifying hedge funds are as a group (probably because HF indices tend to have a massive overweight towards Long/Short equity and credit, which have high correlations to long-only equity), there remain several investment strategies which provide true diversification (e.g. managed futures/CTA). Though some of these diversifying strategies are available in more conventional form – e.g. through an ETF or mutual fund – I appreciate the additional capital efficiency provided by higher-risk versions in ‘proper’ hedge funds. More of a barbell approach to alternative investments (an aside – here is a new paper by Nassim Taleb et al. regarding mathematical justification for a barbell approach).
In sum: hedge funds can be massive wastes of fees, particularly if their performance starts to look very much like long-only equity. However, even a small bit of due diligence can yield solid managers with solid track records in solid diversifying strategies.