[LordOfWolves]

I like to think that most of us folk on HN can agree that hedge funds have had very little to do with the progression of the world beyond the growth of its key members’ pockets and convoluted new “investment methods”.

Pension funds - and similar - can easily be moved to ETFs and other asset classes without the management fees from these funds.

[hollowcelery]

If an investor wants returns that are orthogonal to the market or that avoid exposure to specific factors, then ETFs aren't really an option. This is why pension funds etc. will have some investments in index funds but will also diversify into hedge funds and alternative investments.

Hedge funds and related investment vehicles aren't for most people, but they do perform an important function in the markets. Not everyone can invest passively -- someone has to actually enable price discovery.

[smabie]

Moreover, in a highly correlated world it is unsurprising that institutional investors are eager for less correlated sources of return. The problem is actually finding it: as an allocator you are being adversely selected against. If a hedge fund is willing to take your money, we'll maybe it isn't that great of an opportunity after all.

[xyzelement]

I am probably deeply biased, having spent decades in finance including massive funds, but I'd like to think you're wrong.

On the most simple level - ETFs and passive investments only work because they "invest along" with the rest of the market. With the rest of the market being the active investors, of which the large institutional ones make the most impact.

If they weren't there - then the passives would stop working. The dynamics take a while to visualize but think about the word - passive implies you're following someone who's active. My metaphor for this is water-skiing. The water-skier is MUCH more efficient than the boat that's towing them. However it would be wrong to think that the world would be a better place if everyone just had the skis and nobody had boats - w/o boats, the people are back to having generate their own energy (trading ideas/analysis) and we're back in the worse spot.

Then - on the very concrete level - there's a LOT of state teachers, firemen, policemen, etc. that are able to give their pensioners the what they promised them only because they made wise investments in funds that worked their asses off to provide returns required for that.

[smabie]

Alternatives don't make up the core portfolio of large institutional investors such as pension funds. Instead, they represent a percentage of the portfolio. The purpose of this percentage is to mix in uncorrelated (or less correlated) return streams in order to boost the return/risk ratio of the portfolio.

It would be foolish in my opinion to just replace an entire pension fund portfolio with a couple ETFs. This isn't to say the pension funds are doing a good job (I don't think they are) in their allocation, but to say that everyone should just take out all of their money from hedge funds and put them into ETFs is irresponsible and not something any large investor would ever consider.