What’d you get for your two and 20 this year so far?
On average, hedge funds have returned 8% YTD, according to Goldman’s quarterly analysis, which covers nearly 1,000 funds sitting with almost $4 trillion in gross exposure. Those positions are split between $2.5 trillion of longs and $1.3 trillion in shorts.
If that sounds like a lot of work — not the analysis, but rather managing $3.8 trillion in stock bets just to match the S&P — that’s because it is. And in case you’ve never read a Jack Bogle book, it’s entirely unnecessary. It’s just high-stakes gambling with other people’s money for what, generally speaking, are egregious performance fees which make the already difficult job of outperforming all but impossible during up years for the market.
Regular readers are well apprised of my views on active management, and particularly this sort of active management: It’s an exercise in futility given what I’ve described in the past as “singularity” dynamics which push large-cap benchmarks inexorably higher almost as a matter of inevitable course. Active managers grouse about the deleterious effects on price discovery of over-indexing and “too much” passive investing, and while I agree with the critique on some level, I see no utility whatever in fighting the trend.
And let’s face it: This isn’t actually a new phenomenon. Although the indomitable rise of indexing absolutely represents an epoch, and while it’s absolutely the case that we do need active investors (stock pickers) lest the price discovery mechanism should break entirely, it’s been a very, very long time since buying the index and holding it with dividends reinvested wasn’t the best strategy for at least nine out of every 10 investors.
When you “adjust” for the stress that goes along with trying to beat an index comprised of blue chip American corporates (which, it should be noted, regularly boots the losers), it’s very difficult to make the case that active investing’s worth the trouble. Show me someone who claims to regularly beat a buy-and-hold strategy applied to blue-chip US corporate equities and I’ll show you someone who’s probably a liar.
With that in mind, have a look at the simple figures below, from Goldman’s quarterly “Hedge Fund Trend Monitor” and “Mutual Fundamentals” reports.
Historically, about one in three large-cap growth mutual funds beats its benchmark. This year’s a typical year in that regard. Considering there isn’t a single large-cap growth index (that I know of anyway) which can’t be tracked with almost no error for a token fee (i.e., a handful of basis points), it’s far from obvious why anyone would bother paying someone many multiples of that fee for a one-in-three chance of outperforming. That’s particularly true when you consider the implications for long-term performance drag of habitually subjecting yourself to large fees and less-than-even odds, year after year.
And that’s just large-cap mutual funds, which is to say a very staid business operated by some of the most boring people you’ll ever meet. These are people who didn’t get the memo on messenger bags being preferable to briefcases when it went out two decades ago, nor the note about eschewing heavily-padded suit shoulders for more natural silhouettes when it was sent around on or about 1990. So, not exactly the sort of folks inclined to BASE-jumping (or free-basing).
If you’re silly enough to hand your money over to the BASE-jumping, free-basing crowd, you’re going to pay a lot more than 100bps in management and 12b-1 fees. You’re going to pay for somebody’s bespoke Mulliner and also for the coke that makes them forget to open the LiftMaster before they back it out of the garage. And what’ll you get for that? The figure on the right, above, and the figure below, give you a rough idea in the 2025 context: About 5ppt of outperformance versus SPX from hedge fund longs, and about 2ppt versus NDX.
To be a little more specific, the chart above shows you YTD performance for the Nasdaq 100 and also for Goldman’s index of fundamentally-driven hedge fund managers’ most important positions, defined as those which appear most frequently among their top 10 long equity holdings.
There are two punchlines. The first is that you could get more or less the same performance by just buying QQQ for 20bps.
The second punchline is that Goldman offers an ETF which tracks their hedge fund VIP list. The expense ratio’s just 0.45%.
I so appreciate this post. It affirms that anyone without training (me) can do this.
My portfolio (half SPY and the other half in about 8 hand picked stocks- all tech and cash flow behemoths, except one *) has handily beat Goldman and also SPY.
The only trade I occasionally have to make is when one of the individual tech stocks becomes more than 10% of my portfolio. I trim that position and reinvest in SPY. When I die (not for decades, hopefully), my intention will be to only hold one position. SPY.
With respect to a “Mulliner”, I recently saw that a custom, hand painted, option is available. Start at one end with one color and transition to the other end with a different color. It just shows me that just because people have money, they don’t necessarily have good taste.
The one other stock is a small position that I hold as a tribute to the greatest living investor.
You used to occasionally post about the flows out of mutual funds and into the ETF space. I would imagine that trend has just continued and grown at an expanded pace.
YTD: $650 billion to equity ETFs, $290 billion from long-only mutual funds.
So yeah: Ongoing.
Not to mention the tax efficiency of an index ETF vs a mutual fund or hedge fund. There is very little reason to own active management in efficient markets like large cap U.S. stocks and now with active ETF’s there is zero reason to own a mutual fund in general.
When it comes to bonds, small cap, and international—i am willing to look at active management but still in the ETF wrapper.
hilarious post, thanks H