Do hedge funds beat the market or is it just marketing?

Question

Friends in investment banking tell me you cannot beat the risk adjusted market, along the random walk lines. Either:

1) Hedge funds create so many portfolios that a few of them work by chance and these are the ones they promote in the following years leaflets, i.e. pure marketing whereby they get rich on comissions

2) They actually have strategies that work but are so top secret that we may not hear about them for another 5 years, by which time it no longer works.

Does anyone know the answer?

Answer 1

I have recently been studying this area for my dissertation at university and to really sum it all up it would seem that

- Hedge funds are capable of beating the market, but the chances of a fund consistently beating the market year after year is slim.

- As many funds beat the market there are usually equal numbers that don't.

- As soon as a successful trading strategy is discovered and published it appears to disappear as the market seeks to use the new strategy.

- To get greater return you must take greater risk, sometimes it pays off and sometimes it doesn't.

- A well thought out buy and hold strategy appears to almost always be the best strategy in the long term. Many of the short-term strategies may appear to outperform until trading costs are added.

- It is suggested that some hedge fund managers often buy large amounts of what the fund provider’s regard as 'safe' stocks if they are also buying risky stocks so that if the fund under performs they have some defence against their own performance.

The whole argument is a huge area, with masses and masses of papers written on and around the subject. Eugene Fama is credited with stimulating much of the debate back in 1965 when he first proposed 'Efficient Markets Theory', and later in 1970 the 'Efficient Market Hypothesis' in its various forms.

If you have an interest in the area, then seeking out these articles and replies to them by other authors is a good starting point. Also check out literature on Event Studies, Behavioural Finance etc.

You will soon see that your question is one that doesn't appear to have a satisfying answer to all people!!

Answer 2

The problem is that most hedge fund managers use similar criteria when making investment decisions.

This being the case, in whatever market sector, the decision to go long or short will encompass most of the hedge funds involved in that sector to follow suit.

If they get it wrong and/or risk too high a proportion of their funds, the resultant fall-out in prices can be dramatic. As the commissions are so high and the managers so well paid, at the end of the day, the hedge fund investor can be taking a greater risk than those following the usual investment path in the stock market and mutual funds.

There are sucessful hedge fund managers that buck the trend, but over time they are as likely to underperform as do so many of their counterparts in mutual funds.

Hedge funds have enjoyed the relative sucess of the bull markets in stocks and commodities for the last few years. It remains to be seen how many can cope with the volatility that can now be expected.

It remains to be seen in the coming recession how big the fall-out is. This will then increase the emphasis on marketing and commissions amongst those who stay in business.

Answer 3

Most hedge funds require you to have over $1,000,000. Some require 5M or 10M!!! But they usually won't beat the market. They do perform well (some of them) when the market is going down. But usually the market goes up.

There are mutual funds that have beaten the market over extended periods of time. There are even funds that beat the market, and take less risk than the market.

Answer 4

Yes.

According to the Guiness World of Records.

The highest paid employees are Hedge Fund Managers.

Answer 5

Hedge funds is just another investment tools in the market for people who wish to earn money. Hedgy funds beat the market as they uses financial instruments and assets classes. It can get absolute returns on any market conditions. Hedgy fund is specialized or concentrated and use leverage. Their strategies are usually event driven, fixed artribage, global marco.

Answer 6

they can but they do not always, the have much higher risk and are you really sure what your investing in, better get some details first.. P.S., i used to work for a hedge fund manager,.. never will i invest in one unless i manage it myself..

Answer 7

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