7 ms·

As someone who has worked in the industry: hedge funds are certainly parasites on our society, who make money not from wealthy clients (as is widely thought) bu

by mjfl 2y ago

As someone who has worked in the industry: hedge funds are certainly parasites on our society, who make money not from wealthy clients (as is widely thought) but by managing government money through the social security system, union pension funds, college endowments, and sovereign wealth funds. They are a tool to redistribute billions of dollars of ordinary people's money into the pockets of an 'in-group' that then uses the money to buy political influence. I've watched this happen with my own eyes.

namuol 2y ago
Any advice to reform things? As individuals or as a collective?
- mjfl 2y ago
  (1) widespread education and awareness of this phenomenon, (2) put in restrictions on large institutions i.e. the government, unions, universities so that they only invest in funds with 'low-fee' structures and hire professional risk management at the institution-level that hedge risks using more standard methods like mixing bonds and equities and cash. Ban large institutions from investing in private equity, which is a high fee structure built to hide losses over long term periods.
  - JumpCrisscross 2y ago
    I have invested in hedge funds as an individual. Your proposals would be great for me; less competition. I’m sceptical of the public benefits, though there is absolutely a political bloc who will like the optics of banning public investments in HFs and PE. > private equity, which is a high fee structure built to hide losses over long term periods Empirically false. The problem with PE is the same as HFs: fees and dispersion of outcomes.
    - mjfl 2y ago
      by all means, keep letting those charlatans take your money. Are you denying that private equity avoids reporting standards that are mandated for public companies?
      - JumpCrisscross 2y ago
        > private equity avoids reporting standards that are mandated for public companies? So do startups and small businesses. I’ve made money in both (as well as hedge funds). Good investments aren’t measured by consultant spam. I’d be furious if my managers burned my money on e.g. commissioning boiler plate risk factors.
        mjfl 2y ago
        private equities and startups/small businesses are fundamentally different in terms of the 'skin in the game' that startup founders and small business owners have in their business. They've typically invested themselves significant parts of their lives into their businesses. The same cannot be said of private equity funds, and you should know better.
        JumpCrisscross 2y ago
        > terms of the 'skin in the game' that startup founders I’ve done a startup. My skin in the game was significant, but I was less dependent on the outcome of the startup than I was keeping my job earlier in my career. In any case, fraudsters also have lots of skin in the game. This argument is irrelevant to the irrelevance of public reporting requirements, or the empirical track record of private equity for LPs.
- psytrancefan 2y ago
  How about mind your own business? The main problem to me is everyone wants to tell everyone else what to do "for the good of society" but over my lifetime this has been a slow acting cultural poison. Less than 20 years ago it cost me $7 a trade for one side and that was the cheap revolutionary price for the retail investor. Today it cost me ZERO. That is because of hedge funds. I doubt this will last forever because someone will come along and "fix" what is not broken "for the good of society".
bko 2y ago
> by managing government money through the social security system, union pension funds, college endowments, and sovereign wealth funds Why don't you target that anger and contempt to the organizations willfully giving money to these organizations? "Social security system is a parasite on society, who steals taxpayers money and throws it away in inefficient vehicles evidence over decades that tells us that their investments aren't outperfoming index funds"
- JumpCrisscross 2y ago
  > Why don't you target that anger and contempt to the organizations willfully giving money to these organizations? This happens from time to time. Most recently, in pensions withdrawing from private equity. It’s historically come to bite when these managers hit a bout of volatility. Put simply, portfolio theory is incredibly robust. The question isn’t why hedge funds, but why does it keep paying so well?
  - bko 2y ago
    Why can hedge funds negotiate such high fees despite lackluster performance? You answered it in the prior sentence: portfolio theory is incredibly robust. They (claim) to provide diversified return. The idea is that although they may not provide a net return comparable to low cost equity ETFs, they provide diversified return. And portfolio theory tells us lower yielding assets can actually increase your portfolio's risk-adjusted return, as long as it's not perfectly correlated with your existing investments. Whether this plays out in practice is a different story, but that's the idea and selling point.
    - JumpCrisscross 2y ago
      > Why can hedge funds negotiate such high fees despite lackluster performance? As you point out, what counts as performance varies. Magnitude of net returns is important. But by analogy, you could get massive net returns betting on the Powerball.
ldjkfkdsjnv 2y ago
Yeah places like PIMCO are basically stealing from pension funds through a bunch of complicated financial engineering. Some of the assets they trade arent liquid, theres no consensus on fair price. And so a bunch of funny business goes on
bormaj 2y ago
As someone else in the industry, is it fair to categorize all HFs this way?
- mjfl 2y ago
  funds with high 'skin in the game' as in high amounts of manager net worth in the fund, tend to be an exception to what I'm saying.
jldugger 2y ago
Wait, which part of the social security system is investing in hedge funds?
- stackskipton 2y ago
  US Social Security doesn't. Other countries may like Norway: https://en.wikipedia.org/wiki/Government_Pension_Fund_of_Norway https://en.wikipedia.org/wiki/Government_Pension_Fund_of_Nor...
JumpCrisscross 2y ago
> managing government money through the social security system Do you mean the social safety net? Social security does not invest in hedge funds.
- ceejayoz 2y ago
  Well, not yet.
- barumrho 2y ago
  You are right about Social Security. It only holds Treasuries. But, there are many other pension funds like teachers pension, government workers pensions, etc that manage working class money.
energy123 2y ago
Why are you singling out hedge funds? The blame lies equally with all active fund management, as well as the investment managers (e.g. pension funds) who decide to allocate to them instead of to a passive tracker.
- JumpCrisscross 2y ago
  > blame lies equally with all active fund management, as well as the investment managers (e.g. pension funds) who decide to allocate to them instead of to a passive tracker Except active management works for any metric other than long-term yield maximisation. (Most institutions have short-term needs, whether for liquidity or optics.)
SideQuark 2y ago
Hedge funds don’t magically take your money any more than Santa Claus takes your money. Pretty much none of your claims are true, unless those actors desire to be in a hedge fund (same as any place to invest). For example, social security is prevented by law from investing in anything except specially crafted Treasury bonds. Sovereign wealth funds are not “ordinary people’s money.” Union pensions are controlled by unions, and if they’re wise, are spread over many options. Same for college endowments. It’s not hard to look up the sizes of these various asset categories and see your claims are mathematically impossible. I believe arithmetic over your eyes. Don’t want one, invest elsewhere.
- mjfl 2y ago
  I was wrong about the social security system, which I must have gotten confused with some kind of pension system, like CALPERs, which used to invest in hedge funds before pulling out in 2014, but still allocates 40% of its portfolio into private equity [1], which may be worse than hedge funds for reasons I have discussed elsewhere. Everything else I said was true. > Don’t want one, invest elsewhere. Ordinary people have little control over what their pension funds invest in, and typically are not informed on these issues. [1] https://raoglobal.org/insights/calpers-goes-big-on-private-equity-upping-allocation-to-40 https://raoglobal.org/insights/calpers-goes-big-on-private-e...
  - SideQuark 2y ago
    > which may be worse than hedge funds PE obtains higher returns than public funds simply because they have more options to invest in. They can put the cash into anything public invested funds can choose, AND a massive range of other projects. CalPERS is not an ignorant investor. They see the results, and they allocate accordingly. From your own link : "Over the past ten years, private equity has delivered an annualized return of 11.8%, compared to 8.9% for public equities, 2.4% for fixed income, and 7.7% for real assets. With traditional asset classes like bonds struggling to keep pace with inflation, CalPERS is looking to private equity to help them meet their long-term investment goals." So yes, if you want worse returns, continue to believe unsupportable things. If you want to manage people's money, then choose well, and this is chosen well. >Ordinary people have little control over what their pension funds invest in, and typically are not informed on these issues. Which is good, because they also are not generally capable to manage their investments with as good as returns (otherwise every little mom and pop would beat PE, which is extremely far from the truth). A google scholar search on PE returns versus public, top several hits that give numbers to the question: https://www.joim.com/wp-content/uploads/emember/downloads/P0520.pdf https://www.joim.com/wp-content/uploads/emember/downloads/P0... - PE outperforms https://openurl.ebsco.com/EPDB%3Agcd%3A7%3A13677223/detailv2?sid=ebsco%3Aplink%3Ascholar&id=ebsco%3Agcd%3A169696654&crl=c&link_origin=scholar.google.com https://openurl.ebsco.com/EPDB%3Agcd%3A7%3A13677223/detailv2... "The model illuminates why, over the short term, private returns are superior to public ones, whereas over the long term, public and private returns are largely interchangeable after proper adjustments are made, resolving a long-standing conundrum" https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12154 https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12154 "We study the performance of nearly 1,400 U.S. buyout and venture capital funds using a new data set from Burgiss. We find better buyout fund performance than previously documented—performance has consistently exceeded that of public markets. Outperformance versus the S&P 500 averages 20% to 27% over a fund's life and more than 3% annually. " It's best not to invest with emotion, but with knowledge. Knowledge comes from analyzing markets and reading financial industry research, not repeating misinformed tropes.
yieldcrv 2y ago
I’ve been satisfied with the hedge fund I was in They didn't just do common stock equity trades, they sliced and diced money flows into and out of companies so interestingly It felt like I had employed people to find, and create, deal flow In bear markets theyd find companies that VCs all passed over, and created a pivot for them and extremely favorable capital terms to the hedge fund such as revenue splits before it hits the company’s books When people say parasites, I see transactions that would never have happened I see transactions I would never be able to get into the room to negotiate to happens I also see how nobody knows anything. People see hedge fund movements in equity positions, but they wont see revenue splits, inventory splits for the fund to sell themselves Its all about what you/your fund specifically does

by mjfl 2y ago

namuol 2y ago

Any advice to reform things? As individuals or as a collective?

mjfl 2y ago
(1) widespread education and awareness of this phenomenon, (2) put in restrictions on large institutions i.e. the government, unions, universities so that they only invest in funds with 'low-fee' structures and hire professional risk management at the institution-level that hedge risks using more standard methods like mixing bonds and equities and cash. Ban large institutions from investing in private equity, which is a high fee structure built to hide losses over long term periods.
- JumpCrisscross 2y ago
  I have invested in hedge funds as an individual. Your proposals would be great for me; less competition. I’m sceptical of the public benefits, though there is absolutely a political bloc who will like the optics of banning public investments in HFs and PE. > private equity, which is a high fee structure built to hide losses over long term periods Empirically false. The problem with PE is the same as HFs: fees and dispersion of outcomes.
  - mjfl 2y ago
    by all means, keep letting those charlatans take your money. Are you denying that private equity avoids reporting standards that are mandated for public companies?
    - JumpCrisscross 2y ago
      > private equity avoids reporting standards that are mandated for public companies? So do startups and small businesses. I’ve made money in both (as well as hedge funds). Good investments aren’t measured by consultant spam. I’d be furious if my managers burned my money on e.g. commissioning boiler plate risk factors.
      - mjfl 2y ago
        private equities and startups/small businesses are fundamentally different in terms of the 'skin in the game' that startup founders and small business owners have in their business. They've typically invested themselves significant parts of their lives into their businesses. The same cannot be said of private equity funds, and you should know better.
        JumpCrisscross 2y ago
        > terms of the 'skin in the game' that startup founders I’ve done a startup. My skin in the game was significant, but I was less dependent on the outcome of the startup than I was keeping my job earlier in my career. In any case, fraudsters also have lots of skin in the game. This argument is irrelevant to the irrelevance of public reporting requirements, or the empirical track record of private equity for LPs.
psytrancefan 2y ago
How about mind your own business? The main problem to me is everyone wants to tell everyone else what to do "for the good of society" but over my lifetime this has been a slow acting cultural poison. Less than 20 years ago it cost me $7 a trade for one side and that was the cheap revolutionary price for the retail investor. Today it cost me ZERO. That is because of hedge funds. I doubt this will last forever because someone will come along and "fix" what is not broken "for the good of society".

bko 2y ago

> by managing government money through the social security system, union pension funds, college endowments, and sovereign wealth funds Why don't you target that anger and contempt to the organizations willfully giving money to these organizations? "Social security system is a parasite on society, who steals taxpayers money and throws it away in inefficient vehicles evidence over decades that tells us that their investments aren't outperfoming index funds"

JumpCrisscross 2y ago
> Why don't you target that anger and contempt to the organizations willfully giving money to these organizations? This happens from time to time. Most recently, in pensions withdrawing from private equity. It’s historically come to bite when these managers hit a bout of volatility. Put simply, portfolio theory is incredibly robust. The question isn’t why hedge funds, but why does it keep paying so well?
- bko 2y ago
  Why can hedge funds negotiate such high fees despite lackluster performance? You answered it in the prior sentence: portfolio theory is incredibly robust. They (claim) to provide diversified return. The idea is that although they may not provide a net return comparable to low cost equity ETFs, they provide diversified return. And portfolio theory tells us lower yielding assets can actually increase your portfolio's risk-adjusted return, as long as it's not perfectly correlated with your existing investments. Whether this plays out in practice is a different story, but that's the idea and selling point.
  - JumpCrisscross 2y ago
    > Why can hedge funds negotiate such high fees despite lackluster performance? As you point out, what counts as performance varies. Magnitude of net returns is important. But by analogy, you could get massive net returns betting on the Powerball.

ldjkfkdsjnv 2y ago

Yeah places like PIMCO are basically stealing from pension funds through a bunch of complicated financial engineering. Some of the assets they trade arent liquid, theres no consensus on fair price. And so a bunch of funny business goes on

bormaj 2y ago

As someone else in the industry, is it fair to categorize all HFs this way?

mjfl 2y ago
funds with high 'skin in the game' as in high amounts of manager net worth in the fund, tend to be an exception to what I'm saying.

jldugger 2y ago

Wait, which part of the social security system is investing in hedge funds?

stackskipton 2y ago
US Social Security doesn't. Other countries may like Norway: https://en.wikipedia.org/wiki/Government_Pension_Fund_of_Norway https://en.wikipedia.org/wiki/Government_Pension_Fund_of_Nor...

JumpCrisscross 2y ago

> managing government money through the social security system Do you mean the social safety net? Social security does not invest in hedge funds.

ceejayoz 2y ago
Well, not yet.
barumrho 2y ago
You are right about Social Security. It only holds Treasuries. But, there are many other pension funds like teachers pension, government workers pensions, etc that manage working class money.

energy123 2y ago

Why are you singling out hedge funds? The blame lies equally with all active fund management, as well as the investment managers (e.g. pension funds) who decide to allocate to them instead of to a passive tracker.

JumpCrisscross 2y ago
> blame lies equally with all active fund management, as well as the investment managers (e.g. pension funds) who decide to allocate to them instead of to a passive tracker Except active management works for any metric other than long-term yield maximisation. (Most institutions have short-term needs, whether for liquidity or optics.)

SideQuark 2y ago

Hedge funds don’t magically take your money any more than Santa Claus takes your money. Pretty much none of your claims are true, unless those actors desire to be in a hedge fund (same as any place to invest). For example, social security is prevented by law from investing in anything except specially crafted Treasury bonds. Sovereign wealth funds are not “ordinary people’s money.” Union pensions are controlled by unions, and if they’re wise, are spread over many options. Same for college endowments. It’s not hard to look up the sizes of these various asset categories and see your claims are mathematically impossible. I believe arithmetic over your eyes. Don’t want one, invest elsewhere.

mjfl 2y ago
I was wrong about the social security system, which I must have gotten confused with some kind of pension system, like CALPERs, which used to invest in hedge funds before pulling out in 2014, but still allocates 40% of its portfolio into private equity [1], which may be worse than hedge funds for reasons I have discussed elsewhere. Everything else I said was true. > Don’t want one, invest elsewhere. Ordinary people have little control over what their pension funds invest in, and typically are not informed on these issues. [1] https://raoglobal.org/insights/calpers-goes-big-on-private-equity-upping-allocation-to-40 https://raoglobal.org/insights/calpers-goes-big-on-private-e...
- SideQuark 2y ago
  > which may be worse than hedge funds PE obtains higher returns than public funds simply because they have more options to invest in. They can put the cash into anything public invested funds can choose, AND a massive range of other projects. CalPERS is not an ignorant investor. They see the results, and they allocate accordingly. From your own link : "Over the past ten years, private equity has delivered an annualized return of 11.8%, compared to 8.9% for public equities, 2.4% for fixed income, and 7.7% for real assets. With traditional asset classes like bonds struggling to keep pace with inflation, CalPERS is looking to private equity to help them meet their long-term investment goals." So yes, if you want worse returns, continue to believe unsupportable things. If you want to manage people's money, then choose well, and this is chosen well. >Ordinary people have little control over what their pension funds invest in, and typically are not informed on these issues. Which is good, because they also are not generally capable to manage their investments with as good as returns (otherwise every little mom and pop would beat PE, which is extremely far from the truth). A google scholar search on PE returns versus public, top several hits that give numbers to the question: https://www.joim.com/wp-content/uploads/emember/downloads/P0520.pdf https://www.joim.com/wp-content/uploads/emember/downloads/P0... - PE outperforms https://openurl.ebsco.com/EPDB%3Agcd%3A7%3A13677223/detailv2?sid=ebsco%3Aplink%3Ascholar&id=ebsco%3Agcd%3A169696654&crl=c&link_origin=scholar.google.com https://openurl.ebsco.com/EPDB%3Agcd%3A7%3A13677223/detailv2... "The model illuminates why, over the short term, private returns are superior to public ones, whereas over the long term, public and private returns are largely interchangeable after proper adjustments are made, resolving a long-standing conundrum" https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12154 https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12154 "We study the performance of nearly 1,400 U.S. buyout and venture capital funds using a new data set from Burgiss. We find better buyout fund performance than previously documented—performance has consistently exceeded that of public markets. Outperformance versus the S&P 500 averages 20% to 27% over a fund's life and more than 3% annually. " It's best not to invest with emotion, but with knowledge. Knowledge comes from analyzing markets and reading financial industry research, not repeating misinformed tropes.

yieldcrv 2y ago

I’ve been satisfied with the hedge fund I was in They didn't just do common stock equity trades, they sliced and diced money flows into and out of companies so interestingly It felt like I had employed people to find, and create, deal flow In bear markets theyd find companies that VCs all passed over, and created a pivot for them and extremely favorable capital terms to the hedge fund such as revenue splits before it hits the company’s books When people say parasites, I see transactions that would never have happened I see transactions I would never be able to get into the room to negotiate to happens I also see how nobody knows anything. People see hedge fund movements in equity positions, but they wont see revenue splits, inventory splits for the fund to sell themselves Its all about what you/your fund specifically does