[BuckYeah]

You’re only seeing part of the picture. There are definitely hedge funds outperforming the market but their strategies aren’t scalable for obvious reasons. These funds make great returns for clients as long as they stay “small” enough to stay nimble and fly beneath the radar.

[vintermann]

> There are definitely hedge funds outperforming the market

Of course there are, but for how long? Long enough to rule out chance?

It should be easy to make a hedge fund that outperforms the market, as long as you make two more hedge funds which over the same period, don't.

[cbsmith]

The bigger question is: "how would one identify said funds?".

The economic game theory around hedge funds is not pretty. By the very nature of the markets, if one really could consistently beat the market, it would be extremely rare and valuable skill, so you could charge fees for that service that would cover nearly all of the difference between your performance and market performance. Similarly, if you could identify funds that consistently would beat the market, you'd effectively be one of the people who could consistently beat the market. This means that pretty much all investors putting money in hedge funds can't really distinguish between the funds that consistently outperform the market and those that don't. They consequently have to rely on proxy signals. For the above reasons, one of those signals is... the fees. So, if you are running a hedge fund and you wish to convince investors that you can consistently beat the market, you should charge fees exactly as if you do consistently beat the market. If you don't, that raises a question in investors' minds as to why you don't charge fees commensurate with the service you are providing.

The end result is that a potential investor in hedge funds is faced with a bevy of difficult to distinguish choices, a small number of which might actually be able to consistently beat the market, but charge fees that eat up almost all of the difference in performance. The rest charge fees that would eat up almost all of the difference in performance if they did perform that well, but instead will perform worse overall, and consequently lose the investor far more money than if they just put their money into an index fund.

[chrinc9203]

> Of course there are, but for how long? Long enough to rule out chance?

Over 20-30 years.

Private equity in the US averages 15% annual return, including funds that close/died with a total loss of capital.

Citadel hedge fund was 20% annual return to the investor after fees (individual years range from -10% to 50%). Before fees (that is; their stock picking ability) returns about 40-50%.

Not to mention quant/HFT firms that consistently do 40-80% annual returns over 15-20 years. No wonder quant TC is 2-5x the TC of FAANG AI SWEs.

All the above is closed to “retail” investors, though. It’s not fair, but that’s life.

For most people (less than $10M net worth), VTI/VTSAX/VOO is the best you can do.

[tdullien]

The outsize quant returns are to be viewed with a grain of salt:

The strategies that quant funds run are often capacity-constrained, so if they do 20-40% a year, it is non-compounding. That matters.

[_fizz_buzz_]

Or: some fund managers just get lucky, and when a lot of people start to invest into that fund at some point that luck will simply revert to the mean.