Wednesday, September 24, 2014

Hedge Funds Aren’t An Asset Class or a Strategy

Hedge Funds Aren’t An Asset Class or a Strategy

Stephen Davidoff Solomon, the Deal Professor at makes the case for hedge funds as an investible asset class in the wake of CalPERS divestiture.[1]  While he makes a number of valid points, his arguments in support of hedge funds and those who argue against them are having a debate based on a flawed premise.  Hedge funds are neither an asset class nor a strategy.  They are merely privately structured investment vehicles utilizing a myriad of strategies and fee arrangements that invest in public or quasi-public securities.  The same logic goes for mutual funds and ETFs.  Until we describe HFs accurately, the debate is going to remain muddled. 

Hedge funds are merely a different way of actively managing money.  In the end, the question is whether any of the strategies can add value over an appropriate benchmark, net of all fees.  Conventional money management doesn't add value, so there's no reason to think hedge funds will either. However, the dismal record of active management hasn't stopped sophisticated managers from allocating to conventional managers or hedge funds.  In due course, CalPERS will be lured into some strategy that is packaged as a hedge fund.  Very few can resist the promise of superior performance even if it is fleeting or non-existent.


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