Why would institutional investors like pension funds or endowments invest in fund of hedge funds?


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  1. The bet included the global financial crisis, a time among all times that should have demonstrated the value of hedge funds. The 2000’s were also a phenomenal decade for American investments as were the 90’s and the 80’s . The reality sans-excuses is the hedge funds got smoked in a pretty standard market.

  2. Yale is not outperforming Buffett over any significant time period. They argued that they beat the S&P (not Buffett), but their returns were lower adjusted for the heightened risk they took. Had you simply matched the beta with a basket of high beta S&P you would have beaten them. Beyond that, they specifically cherry picked one 20 year time period but analysis shows they underperformed in nearly every other time period used (longer or shorter):


  1. Another thing worth noting is that P/E returns have inflated sharp ratios owing to mark to makeup accounting and the quarterly valuations. UBS used a great bat flying through a cave analogy. Basically it smooths out volatility.

Some institutional investors are quite simply stupid/lazy but still want exposure to this “valuable” asset class. Can’t be troubled with understanding strategy/exposure/etc and want to outsource it. Maybe they don’t have the resources, who knows.

Bottom like is the whole HF business model is now out of whack. In the 1990’s when they were producing massive returns, the 2&20 fee structure might have been warranted. But now, when you are eeking out 7,8,9% and then 2&20 on top of that PLUS any HFoF fees? No thanks.

The "institutionalization of the HF world has made HF managers rich at the expense of pretty much everyone. Way too many HF’s out there now.

Most of the “outperformance” from before were basically tracking errors… people who got lucky tilting to one or more of those betas basically outperformed. Nowadays you could get the same exposure with etfs at lower cost plus more dilution in the talent pool.

Probably a lot of hedge funds didn’t do great, but you never hear about them because the bad ones disappear. Plus there wasn’t enough data before to prove that they underperformed in general.