Hedge fund

Hedge fund returns… Can You Beat Them?

Hedge fund

Hedge fund returns seem to be dwindling… your return on investment from most hedge funds available are far from appealing. Investing in the S&P beats most hedge fund managers.

Return on Investment

It’s funny that over the years of trading how my views on profit and expectation has changed.

If someone said to me that I could earn 10% ROI when I first started getting interested in trading I’d of likely asked if that was a day or a week. 

But that is the mentality of the new trader. Speed of profits is how a strategy or a system is judged.

It’s not hard to be a successful investor

What is surprising is that if I bought one single stock and held the position for a year (if it was successful and trending in the right direction) a mere 10% return means I’ve just beaten most hedge fund managers. That’s a frightening statistic… although somewhat amusing.

Of course I could buy a stock and lose money, but that could be cut quickly and then I’d look for another stock and another until I was profitable. That is trading. 

A balanced portfolio of 10 stocks that I’m happy to trade over 10 years is more likely to return better profits than most hedge funds. Amazing… so why bother with hedge funds at all?

Well according to this article, the days of hedge fund managers are coming to an end. And it’s understandable.

If you look at this chart you will see that a simple buy and hold strategy on the SP500 has been continually more profitable than the average hedge fund. So without any sort of technical or fundamental analysis you could trade the SP and beat every last breath of BS from your hedge fund manager.

Hedge Fund Returns

Hedge funds sp

So why do people, [and apparently these are smart people] keep investing in hedge funds? It’s normally a minimum of £1 million to get in on a hedge fund, will cost you 2% in fees and a further 20% on any profits made and also comes with restrictions as to when you can withdraw your funds.

I love this explanation from Warren Buffet

Hedge-Fund-Complexity “Most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising “Take two aspirins”?”

It’s funny but probably true, being involved in the secret society of wealthy investors that only few are privy to seems to be as good as any reason. It’s like buying a rolex when a Casio does the exact same thing… tells you the time.

The reality of investing

So it seems more than obvious that in today’s markets you are far more likely to make decent returns from your investments by trading your own funds.

If you were making 10% a year from your own investments and in the knowledge that you were likely to beat most returns that professional hedge fund managers can offer you why should you avoid the opportunity? And you’d certainly be beating the returns that your banks interest rate can offer you.

If you haven’t read the book “The Richest Man in Babylon” then you should. If you consider the teachings of the book it will become clear that it is probably one of if not the the earliest books about trading for a living.

Think about these simple investment principles that the book offers

  • Start thy purse to fattening
  • Control thy expenditures
  • Make thy gold multiple
  • Guard thy treasures from loss
  • Make of thy dwelling a profitable investment
  • Insure a future income
  • Increase thy ability to earn

The book also clearly demonstrates that you should not trust others with your gold to invest wisely for you.

As simple as it might be, if professional hedge fund managers read this book applied it’s teachings and invested once again in the S&P 500 instead of choosing their own stocks, they’ll  be likely to have far happier clients who are also far richer.

As for us smaller traders, keeping it simple with realistic returns in mind will be a surer route to success than the delusions of grandeur that any investment specialist is likely to offer us.

Don’t doubt your ability to invest wisely… most will have you believe that trading the markets is a mystery that only a few ever solve. it’s for that reason you’re better of giving your capital away for someone else to invest for you.

The fact is that It’s not the case at all.

It makes me wonder if people that invest in hedge funds need someone to blame when and if everything goes belly up? The chance of making less money from invested funds with someone else is OK as long as they have someone to blame if it sours. That’s fear of failure is it not?

Having a basic strategy that you trust and following the signals is one of the easiest ways to profit from the markets.

Personally I have found that I make more money and better decisions when I do not take any notice of the noise and news.

Doing so can start you off on the road to trading this, that and everything in the middle for a day, week, or minute. All sensible trading strategy’s seem to vanish. Outside speculators are usually only as good as you can be (if that)

Look at this chart of Apple, you could have made profits, and good profits at that by just trading above and below the 200 day SMA.

Apple Chart

So if you’ve got a spare million quid to boot it maybe a better idea to invest it yourself than trust a hedge fund manager. After all you managed to make the £1000000 in the first place… you’ll probably look after it far better.