The hedge fund industry is a failure. An outright embarrassment to every speculator who has ever looked into the eyes of the market with lust and want. An abomination by any stretch of imagination that has contributed greatly to the continued mistrust of Wall Street despite record highs in the major indices.
What is at the core this failure? How is it that a group of supposedly gifted, talented, well heeled individuals haven't been able to beat their respective benchmark over a three, five or ten year period? Surely there must be an explanation besides the typical excuse of misallocation, misunderstanding of macro conditions and misuse of client assets. I want the essence of this pile of shit dissected and place in front of me as if it was a plate of Fettucini Alfredo at The Olive Garden.
The truth of the debacle that is the modern day hedge fund can be explained by looking at what they have become. Or rather, let us look at what they are not. Hedge funds are no longer places where the most talented traders, investors or analysts go. They are not the cut throat shops that bred the legend of Soros, Robertson, Kovner or Tudor Jones. They are not beacons of independent analysis that point out the extraordinary while leaving the mundane to die.
The modern day hedge fund is no more than a glorified frat house, where individuals of "esteemed pedigree" carry on in a psuedo-business environment, making pseudo-intellectual decisions that create pseudo-results. The vicious cycle of mediocrity they have fallen into is a direct result of the farm system that they access to find talent. There is no originality to be found. Only stale forms of overly-analytical thought that are streamlined away from dynamic forms of analysis that can actually cement relative outperformance.
They all think the same way. They all behave the same way. They all react the same way. They all pile into the same investments. The passion for investing that creates greatness does not exist. Only the passion to collect their 1/20. And that 20 is derived from closet indexing rather any relative outperformance, in most cases.
Perhaps an easier way to convey my message would simply be to say that hedge funds have sold out. I don't mean in the traditional sense, but rather the Chuck D from Public Enemy sense of sell out. The hedge fund industry has been taken over by punks. Individuals who have gone straight corporate without regard for the art form that should be investing.
How much was the average hedge fund up for 2013? 9.21%
How much was the average hedge fund up for 2012? 6.20%
How much was the average hedge fund up for 2011? It wasn't. Down 4.8%
And what are the top hedge fund feeder schools? Here is the list:
Undergraduate Programs
1. Penn (including Wharton)
2. Cornell
3. NYU (including Stern)
4. Duke
5. Stanford
Runners Up: Harvard, Yale, Princeton and Syracuse
Prior to 2000, when hedge funds actually had a history of outperformance that has created the trillion dollar industry that it is today, it was rare that students of the Ivy Leagues would go to a hedge fund.
The correlation here is simple arrogance. And arrogance doesn't fit into the world of finance, especially in your first ten years on the job. A book of knowledge that you use to get a certificate called CFA or a degree titled MBA is not a qualification, only a prerequisite to getting hired so that you may eventually become qualified.
That's what they don't get. You don't come into this business from any program with anywhere near the necessary skills to thrive. That is built through years of struggle, humility and degradation at the hands of the market. There is no other way to get there than through the mud.
If you haven't gotten muddy, then the last place you should be is anywhere near client assets. Until Wall Street understands this fact, the mediocrity will continue. Assets will continue to flow into the hands of the articulate incompetents who lack simple vision while being bolstered by accomplishments that mean little in the world of high finance.
Sell outs.
