Genius hedge fund manager delivers alpha in good times and bad through stellar long and short stock picking, makes prescient market calls, thrives on market volatility and (unlike mutual fund managers) is perfectly aligned with their investors.
That pretty much sums up the hedge fund “myth.” This narrative initially was propagated not by hedge funds themselves, but rather by funds of funds and others who were selling them to end investors. Either way, it’s based on a number of misconceptions, and anyone who’s been paying attention knows it’s a far cry from reality.
The simple truth is that, when you cut through the noise, hedge funds are not that mysterious. Most invest in the same stocks, bonds, futures and derivatives as everyone else. They’re run by talented, motivated investors with relatively flexible mandates. The problem is fees and expectations. When you pay 3-4 percent and expect 2-4 percent in alpha after it, hedge funds need to deliver 5-8 percent of excess returns in good times and bad—a Herculean task, to say the least. Given this, it’s not surprising that you need myths to justify the current business model.
Let’s break down the 10 biggest ones.
Andrew Beer is Managing Partner and Co-Portfolio Manager, Dynamic Beta at Beachhead Capital Management, a hedge fund replication strategist with more than $500 million under management.