I don't even care about the story, this graphic is amazing.

Get your hand out of your pocket.

What was the editor thinking allowing that graphic to be published? Not too smart I'd say.

Yes, I cannot even believe that they published this picture. What are they thinking.

Rule #34 works and it helps people lol.

The graphic is still amazing. LOL

LAWL BAWS

Dear Sheelah Kolhatkar,

You didn't mention that hedge funds, rebranded by the euphemism "absolute return" have become the asset class of choice for endowment and pension funds which were traditionally the most conservative of institutional investors. The last time I checked the Yale endowment, it was 2/3rds invested in "absolute return", and "private equity", the euphemism for leveraged buy out or LBO funds, which are the sibling industry to the hedge funds. Yale's endowment, run by David Swenson, with hedge and LBO funds as its largest asset class, became the "model" for endowment and pension funds. It's called, simply, the "Yale model". Early on, of course, the enormous leverage embedded in the hedge and LBO funds boosted Yale's performance nicely, making Mr. Swenson a hero.

Things did not go so well during the Panic of 2008, when institutions using the "Yale model" were obliged to sell blue chip stocks at fire sale prices to meet cash calls for capital commitments to their hedge and LBO positions. Blue chip stocks were the only assets they had for which there was a bid; you have to make an appointment a year or more in advance to liquidate a position in a hedge or LBO fund. Thus we saw the endowment and pension funds, once the most conservative and long-term oriented of all investors, selling good quality shares into a panicked market, exacerbating the price drop. Not good for them, not good for the market.

Today the hedge funds, taking advantage of Mr. Bernanke's zero interest rates, have borrowed huge sums of capital, which produces wild price swings when this money sloshes around the system. Thus we saw the price of oil go from the low $60s to $147 and back to the $30s during the 2007-2008 time period, without a change in the oil supply/demand equation large enough to produce such price swings. The recent drop in the price of gold, initiated by a seller of many tons of the stuff hitting the Comex on a quiet afternoon is another instance. One can see the elephantine footprints of the hedge funds as they stampede through the markets.

The hedge and LBO funds, and the tycoons who run them, have been the largest beneficiaries of Mr. Bernanke's zero interest rate policy. The politicians, who can avoid their fiscal responsibilities by having the government finance its deficits at low rates and by money printing, are the other. The losers are the savers, the pensioners and working people whose companies are purchased by LBO funds, stripped of their assets, levered up to the hilt, and left to die after the LBO managers pay themselves a huge "dividend". This is known in the trade as a "dividend recap" and I hope you will do an article on it. Essentially the LBO tycoons suck all the value from an enterprise and pay it to themselves as a "dividend", leaving the skeletal remains of the company to wither away.
The employees lose their jobs, and often their pensions, too, joining the 50 million plus Americans on food stamps and without healthcare. I hope you will do a story on LBO funds and the "dividend recap". I am already imagining the cover!!!

someone is for sure getting fired today.

When I first saw the image I was pretty sure the article was all about sexual dysfunction!

"all about sexual dysfunction!"

And if you start to think about the psychology of money runners who put (other people's) billions at risk with really very little true knowledge (as opposed to leverage, mere brass b*lls, and a strong streak of sociopathy...-see 2001 and 2007 and 2014?) then maybe the article really *is* about a bunch of men with (hidden) sexual dysfunction...

as opposed to the "financial managers" or "analysts" that have offer essentially nothing?

To be fair, Soros and Simons returned outside investors' capital because they did so well they no longer needed to be bothered managing others' money. So, 2 killed it, 2 got killed, and Citadel was a draw. Sounds about right - keep flipping those coins.

Got a kick out of ur user name. Ha!

Like the entertainment and sports industry, one rock star emerges out of 90 aspirants.

Rubbish article. You can't even get the definition of "alpha" correct. And what these people do is not "glorified gambling." It is investing.The styles and methods of investing differ from manager to manager, but it is still investing, usually based on intensive and/or proprietary research. What a sensationalized pile of drivel from what was once a decent news magazine. Write any old unsubstantiated garbage to coax people into spending time on your lowly web site and magazine, all to sell irrelevant advertising. Now THAT'S a scandal and the story you should really be covering.

How about some facts instead of empty ranting? Are you protecting hedge fund interests ? (You don't disclose anything about your motives. )

First, when I double checked the definition of Alpha, if you leave out the (idiotic) word "macho" they used, then their definition given of excess return given the risk for an investment, looks pretty close, for an article for a general audience.

Second, they provide data. I don't see you providing any data. Given the outsized expenses (typically the 2% off the top AND 20% of profits) -- then hedge funds should be (over time) providing meaningful alpha AND less volatility. Many articles and some studies have been pointing out that they are not. Are you saying this is a giant conspiracy and they are all lying? If you expect to be credible, where is your proof or at least your data?

As for "investing", that implies long term thinking. The kind of short term trading often attributed to many of these hedge funds is NOT investing -- it IS speculative trading. Why get all riled up about that?

Finally, this result isn't surprising. Great long term investors who have produced terrific risk-adjusted returns for their clients at low costs like Warren Buffett and Jack Bogle have both long predicted this. Bogle in his books and white papers, and Bufffett in his venerated annual shareholder meeting speeches.

Bottom line, overall, very few investors, including these hedge fund managers and active mutual fund managers, manage to produce much alpha. There is simply too much competition via the "Wisdom of Crowds" principles in the major financial markets to consistently outperform.

Thus, such funds tend to underperform (say) an efficient broad based index fund like the S&P 500 (or whatever benchmark they most resemble) by roughly THE TOTAL AMOUNT OF THEIR EXPENSES OVER TIME. Well, since the hedge funds expenses are gigantic -- it's not surprising that their underperformance is gigantic.

One item to factor in here that is easy to forget (and mis-count) -- many hedge funds try high risk strategies and leverage. This may work for several years, earning the managers outsized fees. Then the odds catch up to them and they BLOW UP SPECTACULARLY. So what happens then? The investors get massively screwed, get a little of their money back as the hedge fund closes down, and the manager WALKS AWAY with his final year of fees.

And often starts another fund with another name and another group of suckers.

So while this article may be at the layman level, it basically tells the tale that needs to be told. (Feel free to refute this any time with actual broad based long term studies which actually provide some DATA.)

(Calling the article names doesn't count).

Disclosure: I often disagree with Bloomberg articles, but don't see the problem here. This isn't a left or right issue -- it's about relative risk, performance, and cost. Simple, reasonable, objective measures for investments.

Investing & gambling are on the same spectrum of activities. They are both putting money forward for an uncertain future return. There is a reason why some day traders were treated for gambling addiction.

Plenty of investing uses experience, knowledge, analytics, & research to make enhanced guesses on possible returns & generate long term income but some take significantly higher risk for even higher returns. Many people would view that as gambling. I would definitely put Hedge Funds closer to gambling then M&A, Private Equity, Portfolio Management, Actuarial Investing, Bond Ladders, or VC Funds.

The article is clearly stating that Hedge Fund have gotten too big. It trying to make returns that have become increasingly difficult to reach because the fund are now too large to nimbly move in the market, hedge funds have become rife with excess greed, unjustified risk taking, and major ethics & fiduciary violations. The author states the additional scrutiny will hopefully return hedge funds closer to it original nature. But because gambling addicts never seem to tolerate a bad streak, I bet you will be seeing plenty more Madoff's & Corzine's showing up.

But isn't any business decision with money upfront really a form of gambling?

With respect:

Any business definitely involves risk. Often, lots of risk. That's why business investors need to have a shot at a good RISK ADJUSTED return, or if rational, they won't invest. (And tax rates and regulations and wage rates, like it or not, are part of the calculation a rational business investor will make. Claims about "fairness" will NOT change that reality).

Gambling generally involves short term chance taking, where the results are random for any given bet.

Businesses generally involve providing services that customer(s) wants/needs for a fair profit. The idea is to provide a positive cash flow for income and/or growth over time.

Since things can go wrong (the world changes, mistakes are made, etc) there is risk. However, the idea that a chain of dry cleaners or any other stable, reliable, repeat cash flow generating business is "gambling" is simply wrong.

Isn't it true every opportunity cost can generate return if things go decision makers way but goes into sunk cost if it does not? Even with stable repeat cash flow businesses, there is no guarantee of its future cashflow and their every business decisions will result in either profit or loss for the shop.

No and it is ridiculous to even make such a statement...

Have a great day!

Yes, Ms. Lee, using the other commenters terminology and usage, any business investment is gambling as much as what hedge funds do is. Look at Obama's $500 million loan to Solyndra. That was more of a gamble than what most hedge funds do.

So you are saying that a portfolio consisting entirely of lottery tickets is as valid as one with US 3yr T bills?

You are the worst sort of liar, the purveyor of what is called the 'Big Lie'. Lewis Carroll knew of you and wrote thus:

“When I use a word," Humpty Dumpty said in rather a scornful tone, "it means just what I choose it to mean -neither more nor less.”

Fortunately, we are just 1 or 2 Supreme Court justices away from being able to stop you and yours cold, or 1 'revolution' away from watching you swing from Tyburn pole.

Have a great day!

Life is full of gambles like, do I move to a new state with a lower unemployment to get a job?

It is less about how a hedge fund or business gambles vs. does it do it excessively, intelligently & in an addictive manner.

I think plenty of hedge fund managers are acting less like businesses & more like gambling addicts. The hype their good bets in the market (& that is a common phrase), they frequently increase risk & double down when they get a loosing streak, they violate internal & external rules & guidelines use to prevent overcommitment, over leverage, & unstopped losses.

This is a change for how they operated in the past & is probably due to the fact that they have lose a lot of their prior edge from increase size, fund flow limitation, & other financial institutions becoming more aggressive.

struck a nerve, did it?

No, struck me as rubbish. Feeding fertilizer to the mushrooms who read BBW.

Did you just call yourself a mushroom?
>.>

Why are you reading this? Hehe.

It is "glorified gambling", regardless of how much research goes into the strategy. To call stock market a "ponzi scheme" (the last one out gets nothing) and investing "glorified gambling" are both accurate terms. The amount of money made and the amount of research needed to 'win' is irrelevant to the accuracy of those terms.

You are completely clueless. You don't even understand what a ponzi scheme is. But keep reading trash press like the NY Post and Bloomberg Business Week, and you'll remain blissfully ignorant.

It doesn't matter who is right or wrong but as long as the masses don't enjoy the fruit of their labor, as long as the wealth generated by the people is always redistributed UP, all I have to tell you is STFU and go sit in the back of the class while the adults work on getting these shysters out of the system.

Uh - shysters? So I guess you're the judge and jury as to who does honest work and who doesn't? You sound unemployed.

You STFU jizzface.

you actually couldn't be more uninformed about high finance. Think as you please, and enjoy making little to no money over your lifetime because you're too good for this "gambling" and "ponzi scheme" business

its always gambling.....

It's gambling when stupid retail investors who have no idea what they're doing do it.When people like me do it, it is well researched investing based on education, hard work and lots of experience..

go stroke yourself somewhere else

Much like poker. Though I think the whole idea of pure stock trading just seems...kind of wrong. It's why I got out of day trading, which I was successful in. I was doing no good for the world. None. I was just skimming money where I could. That's what the stock market is. Some people must lose money in the future for me to make money now.

I have a 401K and I have stocks, and I play the game just because. But if the whole trading system were burnt to the ground, I'd cheer it on, at least in its modern form.

you should go stroke yourself somewhere else too...p***y

go stroke yourself with sandpaper.

Who is vetting the graphic design over there??? LOL

Whilst I agree with some of the sentiments expressed, this article is rife with inaccuracies, sweeping statements, and is just generally sensationalist. I would expect an article from a lesser publication to fall prey to so many misnomers, but from Bloomberg this is especially disappointing.

Hear, hear. finally someone who sees it as it is. It's sad that the other 90% of people commenting here are so biased and ignorant.

Hedge fund managers are like most portfolio managers - they aren't great at investing really, they are experts at "selling" themselves. Study after study after study has repeatedly shown that over the longer term (like more than 2 years), index funds do as well, if not better, than any "managed/directed" fund....and for a tiny, tiny fraction of the cost.

What successful person isn't a good salesman?!

I would say this article is 30/70 fair/unfair. It is fair to say the industry is generating less value than in the past and that it's overpaid. It is not fair the way the article manipulates the numbers to paint a vastly, VASTLY worse picture than reality. Perhaps this issue would benefit from a detailed discussion:

In my experience, there is a much greater ability to generate alpha as a small fund that is able to invest in small companies and other illiquid and misunderstood ideas. BBW tries to portray the stages of a fund as purely based on hubris, but in fact it's also the investment set that changes. As a fund grows -- and it must grow to >$500m to really mint money for its people -- funds are no longer able to invest in the smaller ideas that can often be the best. A fine point...but it's not just hubris that lowers returns as more assets flow into the hedge fund world. This focus on hubris smacks of reporter bias.

The undercurrent to the whole story is how ridiculous the hedge fund fee structure is. My view is and has always been that I'd do this job for much less $ (though the partners with houses in Montauk might disagree). More generally, I think it's a story of pricing's delayed catch-up to value. The industry is providing less *value* these days. Pricing/fees are coming down...just slowly. The funds charging 200bps a year of principal are increasingly rare. New money is coming in at 150 or even 100bps...in-line with actively-managed mutual fund prices. Now of course, there's still a question about the absolute levels of value and not just the relative...is it right to charge even 100bps for an industry that -- as the article notes -- has underperformed the S&P500 5 out of the last 7 years?

Here's where the article tips into unfairness.

To kick it off, there's a bit of a logical disconnect. A logical question to ask would be why sophisticated universities, sovereign wealth funds, pension funds, and wealthy individuals have continued to put net money into hedge funds even after a relatively poor period of performance in the last 5yrs. Shouldn't they have withdrawn it all?? If the story was as clear cut as the BBW article tells it, wouldn't YOU have withdrawn all of your money? I certainly would have.

But they haven't. There are three broad reasons why, which parallel the three ways that BBW is over-stating the underperformance of the industry. The BBW article uses 1) the wrong measurement for hedge fund returns; 2) the wrong benchmarks for those returns and 3) also fails to discuss the importance of lower volatility of returns and/or the meaning of net exposure.

First, the BBW article uses the HFRX index as a representation of the entire industry. The HFRX is composed of aminiscule subset of hedge funds that provide daily opportunities for investors to add and withdraw money. This miniscule subset in no way represents the industry. In fact, the BBW reporter could have clicked one tab over on the HFRX website and chosen the HFRI index, which is more broadly representative. Using the data on the website, I'm only able to compare cumulative trailing 60-month returns. On this metric, HFRI scores a +13% while the HFRX scores a -9%. That's vs. the S&P500 at +30%. So I'm not saying the HFRI shows hedge funds are doing as well as the S&P500, but they aren't doing nearly as badly as HFRX would say.

Second, BBW uses the S&P500 as the right benchmark for all hedge funds. That's dumb. "All hedge funds" include a mix of equity, arbitrage, macro, fixed income, and FX strategies. The S&P 500 is not the right benchmark for a majority of these funds. Most of the non-equity strategies, for instance, would benchmark themselves against things like fixed income indices, or even LIBOR -- all lower returning than equities. Once you drill down into sub-sectors, things look a lot different. For instance, the HFRI's Equity index has returned 9.0% cumulatively over the last 5yrs. That's less than the 30% than the S&P500 has returned. Much less. But hold on. HFRI Equities include the entire world, while the S&P500 has been the best performing of all world stock markets since the crash. If you look at the cumulative return of WORLD stocks (MSCI index) over the last 5-yrs, that number is also 9.0%. So if you use the right benchmark, then you get that hedge funds have returned about the same (9.0% vs. 9.0%) as their benchmarks over the last 5yrs. I'm not saying that's amazing, but it's not completely awful either.

How awful this ~equivalent apples-to-apples performance is is where the third issue comes into play. The BBW article completely ignores the importance of lower volatility / lower net exposure. Equity hedge funds, for instance, usually have less than half of the volatility of the broader market. They are hedged, and only have 50% 'net' exposure to the stock market. Further, smart hedging can reduce relative volatility even more beyond this 'net' math. What that means functionally is that, all things being equal, if I'm 50% net long and the MSCI index is up 1.0% today, then I should be up 0.5% if I'm just tracking with the market. Let's go back to the 9.0% vs. 9.0% example from the last paragraph. If you accept that the average Equity hedge fund is 50% net long -- you might have to trust me that they are -- then the 9.0% that the HFRI has returned compares not to the 9.0% return of the MSCI but to the 4.5% 'adjusted' return of the MSCI with 50% net exposure. 9.0% from the hedge funds > 4.5% from the MSCI at 50% net. So hedge funds -- at least equity hedge funds -- have outperformed over the last 5yrs.

Stepping back, that 4.5% 'adjusted' outperformance is NET of fees. It is real. It's not big. It shouldn't be worth bajillions of dollars. But it is worth something.

Sorry this was so long. I actually learned a little bit writing this up. If BBW had spent half the time trying to understand the truth rather than trying to write a great headline (and photoshop a great cover photo), then I think readers would have been better served.

I agree with some of what you wrote. However, I find that being stingy on compensating wealth managers is a recipe for centralization and collectivist disaster. All the talent will leave to higher compensation models. The little guys, and aspirants, such as myself will see nothing in return for navigating inflation, lunacy and a stress filled career. Please read my take on this article over at http://wolfranktrading.com/....
Again, I do agree that using the index chosen is dishonest and full of fluff. How would you feel if your field saw declining incomes and compensation amidst competition from the central banks and their minions and asset gatherers? Or the daily attacks from the media that blames Wall Street and not individual psychopaths for all its folly and evil doing?

You do understand that achieving Alpha is getting harder for everyone in an environment where inflation and low gdp will become the norm? Right? You do realize hedge funds are sometimes fighting against HFT firms who cheat, insider traders, regulations, and a misinformed investor class? Did I forget the media?

If we turn Investment into a Service Mc Job, the talent will go astray and flash crashes and fraud will become even worse in the norm. I guarantee it.

You are kidding right, hedge funds are no different than internet start up ... most will implode, but the ones that hit are financial tsunamis. Only an idiot would use an industry average as a evidence in this kind of situation, the average income of Mexico is stagnant ... tell that to Carlos Slim

What the piece doesn't say is that a good number of hedge fund managers are not exotic at all -- just long, no shorts and many times cash in double-digit percentages. And their 13Fs suggest very little activity from quarter to quarter. Many of these funds have stellar performance -- not just over one year but over more than a decade. I worked for one with a 12-year after-fee return of more than 300%, 10X the return of the S&P probably with an average of 10-15% in cash. And I know of four or five other funds with similarly strong long-term performance. The managers are doing what investors are supposed to do -- deep-dive research, advocating for shareholders and pressuring management to spend capital wisely. And they are aligned. My old boss had all of his capital in the fund. Consider mutual funds as an alternative. They have fewer resources for research and rarely advocate for shareholders. About 70 percent of mutual funds routinely underperform benchmarks, according to the annual SPIVA report published by Standard & Poors. Very few mutual fund managers own their own funds. And for decades, mutual fund managers routinely graced the cover of business magazines -- even though they've either destroyed more wealth or created less wealth than competing passive-index ETFs. Where are the follow-ups? TENS of MILLIONS of Americans have their retirement capital invested in mutual funds, but very few people are aware of lack of alignment and chronic underperformance. The mutual fund industry, which spends millions on marketing -- including a lot of pages in Barron's, BusinessWeek and the WSJ --still manages to wear a halo. Consider this question: How ethical is it for a 401k plan to sell a large cap mutual fund that has a 30% chance of success when it can sell an ETF like SPY or an index mutual fund that has a 100% chance of success? Every year, tens of millions of mutual fund investors are spending more (in fees) and getting less (in performance) than they would if they just bought the market. And no one is telling them. So now that you've done hedge funds, how about looking at mutual funds?