I don’t think hedge funds are an optimal way to manage assets. Here are some of my reasons:
To me it seems that we are running into the limits of arbitrage. Shorting is unnatural, and so are many derivatives. How much do you have to pay up to get someone else to take the other side of the trade?
Only so much stock/bonds, etc., can be lent out and shorted with no additional cost. Beyond that, shorts have to pay up, and that crimps their profits.
This is one big reason why I am happy to be a long-only value investor. I only have to focus of businesses making money versus their current share price. I don’t have to deal with the games surrounding shorting. That simplifies my decision making considerably.
- The fees are too high. Why pay 2% of assets, and give up 20% of the profits?
- Hedge funds, aside from Commodity Trading Advisers and Global Macro funds, tend to be correlated, yield-seeking, and volatility-averse. Why pay up for correlated performance?
- The statistics behind hedge fund marketing suffer from backfill bias, survivor bias, and a few other biases.
To me it seems that we are running into the limits of arbitrage. Shorting is unnatural, and so are many derivatives. How much do you have to pay up to get someone else to take the other side of the trade?
Only so much stock/bonds, etc., can be lent out and shorted with no additional cost. Beyond that, shorts have to pay up, and that crimps their profits.
This is one big reason why I am happy to be a long-only value investor. I only have to focus of businesses making money versus their current share price. I don’t have to deal with the games surrounding shorting. That simplifies my decision making considerably.