Hedge funds. In theory, they are an elite, high-risk, high-return financial vehicle for so-called “sophisticated investors.” In reality, they often seem to be little more than a way for some rich dudes to rip off other rich dudes.
New evidence for that reality comes from Goldman Sachs, via Bloomberg News. The investment bank analyzed the holdings of 854 funds with $2.1 trillion in equity positions. It found, first of all, that all those “sophisticated investors” would have been better off stashing their money in basic, hands-off index funds or mutual funds last year — both of them had higher average returns than hedge funds did. The average hedge fund returned 3 percent last year, versus 14 percent for the Standard & Poor’s 500.
Embarrassingly for the yacht-club set, that’s not really unusual. Indeed, the S&P 500 has outperformed hedge funds in 9 of the past 12 years, with the hedgies returning 7.5 percent a year, compared to the stock index’s 11 percent. Granted, over a longer time horizon, hedge funds seem to return about as much as major stock indices do, or a little more. According to Credit Suisse, hedge funds have returned about 8.5 percent annually since 1994, not far off from the S&P. But very few hedge funds deliver consistent market-beating returns. Often, investors pay handsomely for mediocre performance. (There’s no 2-and-20 to invest in an index fund.) And of course, many hedge funds are money-losing catastrophes.
There’s a fun new finding from Goldman Sachs, too. A lot of hedge funds owe their recent positive performance not to some sophisticated macroeconomic strategy or exotic new financial instrument or deep insider knowledge. They just owe it to owning Apple stock. “As the most popular hedge fund long holding and largest U.S. stock, Apple is a key driver of hedge fund performance,” the Goldman Sachs report says. Given the tough climate for hedge funds, Apple has “played the role of savior,” Bloomberg wrote.
So there you have it. Sophisticated investors have trillions stashed with some dark-suited yahoos with the world-beating idea of investing in Apple. No wonder the country’s biggest pension plan is pulling out of hedge funds entirely. And it seems worth noting that Apple stock has not just beaten but round-house-kicked the hedge fund sector over the past 20 years. It’s offered an annual rate of return of about 25 percent since 1994.