John Arnold@JohnArnoldFndtn 6h6 hours ago Poker analogy explains hedge fund underperformance. In 2000, there was 1 pro for every 9 amateurs. Now it's reverse.
Competition will cut profits from all. Anyway they are heading to 0 profits according to Bertrand Paradox
That's the average of all hedgefunds correct? Hedgefunds should be roughly a zero-sum game... so the close to 0 profits would be correct. However, you will always have top traders at top hedgefunds... which will make money, hence why those traders earn a lot.
I don't think hedgefunds are a zero-sum game. Most hedgefunds are long risk which means they are competing against mutual funds and other real investors for assets that generally generate positive returns. Same money chasing the same assets just on a higher fee structure. There are other hedgefunds who effectively "take" from mutual funds through HFT or other forms of front running. Overall the hedgefund community (in dollar weighted terms) should be positive gross returns. But there are so many of them that net returns (after costs) might not be that high.
To use poker parlance, hedge funds use to be able to sheer tourists of their hard earned money when they sat at the table. Now the family man from Ohio that use to sit down at the table has been replaced by a machine that always optimizes their bets perfectly and carefully plays each hand. Much tougher game.
If you look at the performance of many (if not most) long-short funds, they are well correlated with the S&P 500. The real problem is, obviously, that the bigger guys are slowly transforming themselves into asset managers while still charging hedge-fund level fees.
I'm not sure whether hedge funds take retail traders' money.. I doubt that is/was their goal. That's more the HFT and MM's. Which are a bit different, although there are overlapping strategies. Pure hedge funds don't trade against mum and dad. But I think @sle is right. Bigger funds might adapt slowly to rapidly changing market situations. And that never works... it's been a difficult market altogether, with policies in uncharted territory and no real strong forward guidance etc. That would IMO do hedge funds harm....
They need alpha. Ultimately that comes from less informed or less capable players which in the past has been retail. Still is. But there are fewer of them around. I don't think Ray Dalio is the best example but there are probably close to 10k hedge funds out there and 90% of them are under 25 million and small quant players. The top 10% though probably make up 80% of the total assets but as Sle said, they have morphed into portfolio managers. The smaller funds I know personally are all eating or trying to eat retailers. Most of them successfully still do.
nice podcast.. Michael made some interesting argument about luck and paradox of skill http://changethis.com/manifesto/100.03.SuccessEquation/pdf/100.03.SuccessEquation.pdf