Only 3 hedge funds outperformed the S&P in 2021

[Poker Player]

If anyone is thinking of buying shares of a hedge fund recommended to them by the banker, they had better think again.

It appears that only 3 of the 12,000 hedge funds available have beaten the performance of the S&P 500 in 2021. I say it seems because I don't see any top quality sources to back it up. I first heard it on a YouTube video and doing a search I only see these two sources:

Reddit: Only 3 hedge funds outperformed the S&P 500 in 2021

Blog: A deep dive into NFTs

In any case, the news is in line with what we already knew some years ago. Very few hedge funds beat the S&P 500 index, and the longer the term, the less they beat it.

Investopedia: From January 1994 to March 2021—through both bull and bear markets—the passive S&P 500 Index outperformed every major hedge fund strategy by over 2.5% in annualized return.

There was even a famous bet by Warren Buffet on the subject, won by him:

Buffett's Bet with the Hedge Funds: And the Winner Is …

It is not worth paying high commissions to have a small chance of beating the index. If you buy the index directly you have a clear probability of more than 90% of having a higher return than the rest of the industry.

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[Mauser]

It is not worth paying high commissions to have a small chance of beating the index. If you buy the index directly you have a clear probability of more than 90% of having a higher return than the rest of the industry.

This is exactly why I stopped buying any new investment funds. I still hold two in my stock portfolio because they performed exceptionally well in the past and I don't want to realise any investment gains for tax purposes right now, so I just let them running. The whole financial industry is about making the banker and the investment manager rich. Like all the big funds require you to pay a commissions of 2-5% before even making any returns. Than you have the the yearly fee of another 1-3% that is even paid when the fund turns a loss and on top of that the hedge fund will take 10-20% of any profit he makes. These fees are way too high compared to less than 0.5% per year for ETF funds.

[Hydrogen]

The hedge fund format could be a bad indicator for gauging average investor performance. I think hedge fund managers are very limited and restricted with their trading. They must buy and sell assets at inopportune times to accommodate clients depositing and withdrawing funds. This is one reason their historical returns are typically less than 5% annually. Which is a very low return on investment (ROI). Hedge funds also tend to play it safe as they trade with large sums of other peoples money.

Day traders do better than hedge fund traders. Crypto traders do better. Everyone does better than hedge funds on average.

The hedge fund statistic is where to look to find asset traders with the lowest average return on investment.

[timerland]

Well, it wouldn't be surprising.

Hedge fund managers generally make their fortune managing other peoples' funds and collecting a 2 and 20 fee on assets managed, which simply means that it is impossible to outperform the market in the long run in aggregate.

But they do offer some degree of safety/security. E.g. Dalio's fund went up during the GFC, while the S&P obviously crashed. But these are rare cases.

[hello_good_sir]

The hedge fund format could be a bad indicator for gauging average investor performance. I think hedge fund managers are very limited and restricted with their trading. They must buy and sell assets at inopportune times to accommodate clients depositing and withdrawing funds. This is one reason their historical returns are typically less than 5% annually. Which is a very low return on investment (ROI). Hedge funds also tend to play it safe as they trade with large sums of other peoples money.

Day traders do better than hedge fund traders. Crypto traders do better. Everyone does better than hedge funds on average.

The hedge fund statistic is where to look to find asset traders with the lowest average return on investment.

Any sources on these claims?

There are great hedge funds that outperform in the long run, like Rennaisance Technologies managed by Jim Simons.

But the vast majority just return market returns over the long run before-fees and therefore below market returns after-fees. The hedge fund format is definitely outdated and needs to include more asset classes than just the traditional long-short equity-bond portfolio, but I don't think that day traders can do better than them on an after-fee basis in the long term either.

[pinggoki]

You don't have to look for a funds that will beat S&P though, pretty sure that you will be able to make more money doing index funds instead of looking for the right one, and it's not surprising that only a few could beat S&P because it's difficult for individual corporations and hedge funds to do that in the first place.

[Hydrogen]

Any sources on these claims?

There are great hedge funds that outperform in the long run, like Rennaisance Technologies managed by Jim Simons.

But the vast majority just return market returns over the long run before-fees and therefore below market returns after-fees. The hedge fund format is definitely outdated and needs to include more asset classes than just the traditional long-short equity-bond portfolio, but I don't think that day traders can do better than them on an after-fee basis in the long term either.

Renaissance Technologies is an HFT algorithmic fund. AFAIK those trade in darkpools rather than standard markets accessible to the general public. Which puts it outside the category of how a normal hedge fund could be expected to perform. I think most big HFT and algorithmic trading gains came early on with arbitrage trades, before HFT markets became as heavily saturated as they are today. Where there is much more competition to execute the same algorithmic strategy.

Profitable day traders would be those affiliated with the gamestop bull run or the big dogecoin pump. Those types definitely outperform the traditional hedge fund. I think most would agree with that? There are some I've seen do well day trading penny stocks.

Hedge funds have traditionally been very lucky if they succeed in breaking 5% year over year gains. The average successful day trader can beat 5% annual gains, easily.

Another obvious thing I forgot to acknowledge is, its much easier to buy and sell assets. Get in and get out. Trading small sums of money. Than it is with large sums. That's another big advantage that daytraders have over hedge funds which manage much larger sums. Smaller traders definitely carry some advantages.

[Tytanowy Janusz]

"past performance is not indicative of future results". The fact that SP500 was the best choice in 2021 does not mean it will be in 2022 or 2023. SP500 pumped more than 2x in last 2 years. i would not call it "healthy grow". It is possible that market cycle in which we are currently (developed markets and grow stocks as most popular investment) is about to end and we may see a situation similar to buying sp500 in '98 fo 1000$ and sell in 2009 after 11 years for 950. You never know. Thats why well balanced portfolio is not a "yolo jump 100% into sp500" but also other assets.

[Poker Player]

"past performance is not indicative of future results". The fact that SP500 was the best choice in 2021 does not mean it will be in 2022 or 2023. SP500 pumped more than 2x in last 2 years. i would not call it "healthy grow". It is possible that market cycle in which we are currently (developed markets and grow stocks as most popular investment) is about to end and we may see a situation similar to buying sp500 in '98 fo 1000$ and sell in 2009 after 11 years for 950. You never know. Thats why well balanced portfolio is not a "yolo jump 100% into sp500" but also other assets.

But that's not the point I am raising here. If you had purchased anything as an investment before the crash of '29 you would also be at a loss 10 years later and to conclude that therefore one should not invest is a fallacy, which is pretty much the same as what you are doing.

The question here is whether buying an S&P 500 index fund is more profitable than buying one of the tens of thousands of mutual funds that are available.

I didn't say you have to put all your eggs into the S&P 500 basket. You can own Bitcoin and Real State as well, for example, or other assets.

[Tytanowy Janusz]

The question here is whether buying an S&P 500 index fund is more profitable than buying one of the tens of thousands of mutual funds that are available.

Yea, but it should not be done by analysing past performance only. None of you are comparing price to value, talk about market cycles or any other fundamental indicator. It was better than founds in 2021 so its better to invest now? The real question is (it is possible we will find an answer soon) how will other assets perform if SP500 will dump 50% in 1 year and another 60% in next 10 years. Will hedge funds perform even worse?

[SquallLeonhart]

the news is in line with what we already knew some years ago. Very few hedge funds beat the S&P 500 index, and the longer the term, the less they beat it.

This is exactly why I like to be long term. If you buy bitcoin and hold it long enough, there are very few people who will end up being more profitable than you by trading daily. Not saying that there will be none, but it will be a tiny percentage. So if you think that over the next 10 years, you could make more profit by trading daily then me just simply holding bitcoin, I feel like Warren Buffet and wager you but I do not have the money for it .

It is quite easy to see how long term holding is better, S&P is also a good bunch of stocks as well, it is the top ones and that means we are wagering on the great companies to keep doing great and that's not really that wild to guess.

[Poker Player]

Yea, but it should not be done by analysing past performance only. None of you are comparing price to value, talk about market cycles or any other fundamental indicator. It was better than founds in 2021 so its better to invest now?

If you had stopped to read the OP, you wouldn't be trying to counter-argue with something that is clear in the OP. It is not that the S&P was the best choice in 2021, it is that every year that passes we have more data to support that it is the best choice every year and in the long term. I'll put it again to see if you can read it:

In any case, the news is in line with what we already knew some years ago. Very few hedge funds beat the S&P 500 index, and the longer the term, the less they beat it.

Investopedia: From January 1994 to March 2021—through both bull and bear markets—the passive S&P 500 Index outperformed every major hedge fund strategy by over 2.5% in annualized return.

The real question is (it is possible we will find an answer soon) how will other assets perform if SP500 will dump 50% in 1 year and another 60% in next 10 years. Will hedge funds perform even worse?

From 1994 to 2021 the stock market went through two major crises, the .com and 2008, the S&P 500 was a better choice (see the bolded quote just above). Could this change in the future in the next crisis? It could, but the data we have available so far says otherwise.

[Tytanowy Janusz]

Don't worry about me, reading the posts. I read very carefully I just have different approach which has not been properly eplained.

From 1994 to 2021 the stock market went through two major crises, the .com and 2008, the S&P 500 was a better choice (see the bolded quote just above). Could this change in the future in the next crisis? It could, but the data we have available so far says otherwise.

Because US is the global leader for decades. But it was not like that always, and will not be like that forever.

For example:

Good read:
https://asiatimes.com/2020/04/us-china-decoupling-a-reality-check/?fbclid=IwAR2N9_dc89rHbTI2vBKYB-ys-7SwkbCjLbzCtguMowTN_0SMjcdrzpDzQ6Y

When china is building technology ... last years US grows mostly by exporting their major product - US dollars. Just like Spain in XV century was a superpower, discovered America and then collapsed due to an excess of prosperity that did not come from the production/technology but from the stealing gold from America (easy money for them ... just like printing USD)


https://www.multpl.com/s-p-500-pe-ratio

Based on 20 year history SP500 is good investment, based on 140 year history, SP500 is at least x2 overpriced right now. Dump to P/E =5 is equal to more than 80% dump.

"More than 600 U.S. companies are zombies, defined as not making enough money to pay the interest on the debt they've accumulated."
https://www.millionacres.com/real-estate-investing/articles/us-zombie-companies-are-now-26-trillion-in-debt-what-does-that-mean-for-investors/


https://stansberryinvestor.com/articles/health-wealth-bulletin/the-walking-dead-of-the-business-world

The fact that sp500 outperformed other products in last 20 years is not an indicator for future grows. "Black Swan" by Nassim Nicholas Taleb is a good read for you. I'm investing all over the word, stocks, bonds, reits. I don't even know if my non-crypto portfolio was outperformed by SP500. I don't care. I know its not worth the price at current levels so I'm not gonna buy it. Mostly because if we are about to enter global crisis ... I'm not 100% sure that after 10 years and -70% on SP500, we will exit global crisis with US as global leader just like in 2000 and 2008. And that was mostly why SP500 was outperforming everything last decades.

[Poker Player]

-snip

Yeah, well, but, again, I did not create this thread to compare if the S&P 500 is absolutely the best investment, the comparison is with assets of the same style, that is, funds. Not compared to gold, Real State, etc.

Is it overpriced? Well surely, it seems so to me. That China can outperform the US? Surely also.

It seems to me that you look at it from your personal perspective, that you are very diversified. I'm somewhat diversified too, not as much as you seem to be, but I don't invest only in the S&P 500.

Anyway, do you think being so diversified saves you from the next crash? In the most recent ones, COVID and 2008, as far as I remember everything went down, at least initially. Being diversified is a protection against risk, but it is usually less profitable as well.

[paxmao]

If anyone is thinking of buying shares of a hedge fund recommended to them by the banker, they had better think again.

It appears that only 3 of the 12,000 hedge funds available have beaten the performance of the S&P 500 in 2021. I say it seems because I don't see any top quality sources to back it up. I first heard it on a YouTube video and doing a search I only see these two sources:

Reddit: Only 3 hedge funds outperformed the S&P 500 in 2021

Blog: A deep dive into NFTs

In any case, the news is in line with what we already knew some years ago. Very few hedge funds beat the S&P 500 index, and the longer the term, the less they beat it.

Investopedia: From January 1994 to March 2021—through both bull and bear markets—the passive S&P 500 Index outperformed every major hedge fund strategy by over 2.5% in annualized return.

There was even a famous bet by Warren Buffet on the subject, won by him:

Buffett's Bet with the Hedge Funds: And the Winner Is …

It is not worth paying high commissions to have a small chance of beating the index. If you buy the index directly you have a clear probability of more than 90% of having a higher return than the rest of the industry.

As you say it, it sounds much worse than it really is. There are many funds out there that outperformed the SP500, even if you are speaking about the Total Return , that is, including dividends. The SP500 has performed greatly thanks to just a few companies (typically the FANGS), Microsoft and the like. Indexes in which these are particularly overweighed or any fund with bias to technology has outperformed the SP last year.

BTW, it is time to become a bit more defensive for the time coming.

[fiulpro]

I do think that we cannot compare the hedge fund value to the overall economic progress. At the end of the day the hedge fund might be performing extremely well, but at the same time the whole investment might be suffering. Buying shares of hedge funds is quite complex, the structure is more focused on short term selling. This does mean that it would still be a worse investment as compared to* bitcoins*

The volatility in this sense is extremely important and it's not really a probelm showing how the volatile assets can outperform the short stable ones and cause the investors to get plenty of profits during the pandemic. But then again for me I prefer investing in Bitcoins. They are far better than hedge funds personally speaking, most of the people I know are earning tremendously from those tho.

[Fortify]

If anyone is thinking of buying shares of a hedge fund recommended to them by the banker, they had better think again.

It appears that only 3 of the 12,000 hedge funds available have beaten the performance of the S&P 500 in 2021. I say it seems because I don't see any top quality sources to back it up. I first heard it on a YouTube video and doing a search I only see these two sources:

Reddit: Only 3 hedge funds outperformed the S&P 500 in 2021

Blog: A deep dive into NFTs

In any case, the news is in line with what we already knew some years ago. Very few hedge funds beat the S&P 500 index, and the longer the term, the less they beat it.

Investopedia: From January 1994 to March 2021—through both bull and bear markets—the passive S&P 500 Index outperformed every major hedge fund strategy by over 2.5% in annualized return.

There was even a famous bet by Warren Buffet on the subject, won by him:

Buffett's Bet with the Hedge Funds: And the Winner Is …

It is not worth paying high commissions to have a small chance of beating the index. If you buy the index directly you have a clear probability of more than 90% of having a higher return than the rest of the industry.

A solid and timely start of year reminder that the majority of actively managed funds are terrible for your money when compared to passive index funds. Even when you have a very intelligent fund manager who is able to pick the right companies at the right times (extremely difficult to do) the way that the fees are setup will eat away at any potential benefits they give you. On top of that it is in their best interests to trade as much as possible to boost internal transaction fees which they also take a commission on. It's also worth knowing that the average fund manager stays in position for about 8 years, so even if they are successful in the short term, your money needs to be invested properly for a lifetime, passive is the only way to go.

[wxa7115]

It is not worth paying high commissions to have a small chance of beating the index. If you buy the index directly you have a clear probability of more than 90% of having a higher return than the rest of the industry.

This is exactly why I stopped buying any new investment funds. I still hold two in my stock portfolio because they performed exceptionally well in the past and I don't want to realise any investment gains for tax purposes right now, so I just let them running. The whole financial industry is about making the banker and the investment manager rich. Like all the big funds require you to pay a commissions of 2-5% before even making any returns. Than you have the the yearly fee of another 1-3% that is even paid when the fund turns a loss and on top of that the hedge fund will take 10-20% of any profit he makes. These fees are way too high compared to less than 0.5% per year for ETF funds.

And those fees are precisely why almost no one that invest in those funds can outperform any market, not only that the majority of those funds just use an index to follow the movements of the market and then charge those huge fees, which makes impossible for them to ever beat the markets and make people waste money in a service they do not need.

Which is why the need to learn how to invest and trade by ourselves is critical, after all do we know of any successful investor or trader that delegates their money completely to someone else? I think the answer is no, every single one of them know how to invest by themselves, and that is an example we need to follow.