Home > The Business of Trading > Professional Trading > What % of Hedge Funds/Institutions actually make money?

What % of Hedge Funds/Institutions actually make money?

  1. What % beat the S&P?

    How many actually make money every year?

    What's the lifespan of an average hedge fund?

    How many actually survive/succeed?
  2. Good question. I would also like to know what is the percentage of hedge funds who beat the passive benchmark index? If they can't beat the index, it is a waste of money to hire these expensive managers when there are cheaper alternative passive index ETFs.
  3. Means most of hedge funds are not doing well aren't they? ... I always thought most hedge funds made money since they were "Professional"
    • What % beat the S&P?
    Of all funds, probably 10-12% at most. Smaller funds do it more frequently, larger ones less so.

    • How many actually make money every year?
    Plenty. Most multi-manager shops have no losing years and rarely have down months.

    • What's the lifespan of an average hedge fund?
    Hard to tell. Most startup funds fold after 2-3 years. If they reach “critical AUM”, they usually stick around.

    • How many actually survive/succeed?
    Very few. Out of roughly 3 trillions of AUM in the hedge fund industry across about 3k registered funds, over 30% is managed by about a 100 shops.
  4. What does this mean? Over 30% of the 3k registered funds are managed by 100 shops? Meaning these 100 shops own an average of 30 funds each?
  5. Managing a fund is mostly about retaining the AUM - some do it by making money, some spin it as “un-correlated bet” etc. Making good returns on a large asset base is pretty hard, especially with good risk metrics. Because of that, most managers resort to various spins, “we are the tail hedge”, “we are diversified” etc.
  6. No, simply that top 100 funds out of 3 thousand manage about a trillion of the total of 3 trillion. It’s a winner take all industry
  7. Does this percentage of beating S&P500 include the 2-and-20 fees or before?

    SPY ETF annual fees is only 0.09%. If the hedge funds are able to beat SPY despite their much higher cost, it will be interesting to know who they are. I would like to follow these skillful hedge fund managers.
  8. Wow, meaning it's kind of like the retail trader industry, few make big $$$. The rest make little to no money I assume?
  9. Being winner-takes-all, then performance will suffer eventually. The bigger the AUM, the poorer the performance. It seems going back to cheaper, passive S&P500 ETF makes more sense.
  10. This metric should be broken down into funds from

    0-500M in AUM
    500-1B in AUM
    1B and above

    Once the AUM reaches certain point it becomes hard to take quick positions and exit them.

    Greedy bastards refuse to hire more analytical support to dive into more stocks and instruments.

    Also hedge fund formula should have some mandatory hurdle rate beyond which the 20% incentive kicks in. Giving 3% hurdle for inflation might be a good start.
  11. Call them what you may, but just because they have more information than you, and have a room full of guys with a PhD, BB, and the best software, they still can do no better than buy near the start of a trend and exit near the end. You too can do that, after a good bit of study, of course!! Then you can call yourself "Professional"!!
  12. I think we've already decided that whatever the funds do, we have at least the possibility of doing better.
  13. This may not be a fair metric. This assumes the comparison is being 100% long the "market" while most of those participating with hedge funds are looking for other investments that don't replicate the "market" from a risk standpoint.
  14. Good, you're learning.
  15. I'm not a full time trader anymore and have a full time job. I have allocated toward hedge funds and CTAs so they can do that full time and I can do my job. Even if you are a full time trader, you can't be good at everything. If you have excess capital and can allocate it toward a manager that does something different than you, to me, it makes a lot of sense. I'm not at all concerned with the 2/20, only what I net and what risk was involved in getting me that.
  16. Who, me? Learning what?
  17. I don’t see how knowing which multiple manager fund is able to beat the market would help.

    No, the few manage the majority of money (which, of course, means they make the most on fees). In terms of performance, I’d bet that there is inverse correlation with AUM.

    You can do anything with a bit of study. I doubt you will be beating the performance of HFT guys any time soon, though :)

    One thing worth remembering is that we are comparing two very different animals. A broad group “hedge funds” includes everything from long-short to ultra high frequency. Some of them make really nice returns all the time (like the HFT guys, for instance), some will only make money at the time of crisis (tail funds, or so they promise) and some have a mix of the above.

    Also, it’s much easier to make good ROC on a smaller pot. I personally found that growing capacity beyond 25/year was a real challenge for my current set of strategies (while keeping reasonable risk metrics). Someone who does stuff like HFT is likely stuck at a quarter of that amount.
  18. One other thing to mention here is, unlike many small retail traders on ET, most HNW individuals are not investing in hedge funds to get rich. They already are rich. They are investing to keep their money. Usually for their legacy whoever that is...kids, endowments, trusts, etc. These people could care less about beating the S&P 500. They care much more about tax optimization and keeping what they have.

    On the other end of the spectrum, most little guys on ET are not rich and they think trading will make them rich so their concerns are not holding on to wealth or minimizing taxes but going for super high returns. The idea of blowing out for most on ET is really trivial since for many that equates to losing a few thousand dollars. Easy to come back from that. Once you have millions in the bank, taking risk is the last thing you want to do.
  19. Ray Dalio manages monster AUM and much of it is now in All Weather, a passive portfolio that's somewhat better than the standard 60% stocks 40% bonds. It mostly applies a bit of leverage to the bonds to put them on equal footing with the stocks when it comes to portfolio construction. That helps to put equal risk in the asset classes unlike 60/40 which has almost all risk in stocks. It's possible to get 10% return and less than 10% volatility p.a. with such a risk balanced approach.
  20. This hits the nail on the head. Most hedge funds aren't trying to beat the S&P 500, in fact the incentive structure for fund managers is generally definitely not aligned with beating the index nor is it their stated goal. Judging a fund that's targeting certain max drawdown, volatility, and correlations against S&P performance is...naive, to be nice about it.
  21. I would disagree here a little. Most MNW invest in hedge funds because they can stand and sustain the "extra risk" that these types of funds bring on the table while promising "little extra" returns. That is why SEC's rules allow HFs to accept only accredited investors with above average risk tolerance i.e. good cushion in case the HF dips badly in returns.

    Some HFs do however bring in diversification to the overall portfolio of the investor. Ex: Commodity, Futures, Forex funds have main sales pitch that these types of investments offset risk and correlations with other markets.
  22. This isn't entirely correct...

    Firstly, the $160bn AUM is split roughly 50/50 between Pure Alpha and AllWeather. Secondly, the above description of the risk parity strategy is, shall we say, a little misleading. Thirdly, it's true that the recent regime has been particularly friendly to risk parity strategies, such as AllWeather. This may not be the case going forward.
  23. The reason for the accredited investors does not have to do with the risk of the strategies of the managers but rather the risk of the manager itself. In other words, investors in hedge funds do not get the same protections that retail investors get. Because of this, the gov't wants to make sure if your manager runs off to Brazil with your money, it's not going to ruin you. How many stories do you hear about rogue mutual fund managers? Almost never. They are highly regulated. If you ever get very wealthy one day you will understand. It's a lot easier to spend your whole live in poverty then to have been wealthy once and lost it all. The latter usually results in suicide, the former it's just called the daily grind.
  24. In my experience, I have never had a wealth investor, fund of fund or family office ever use the S&P as the bench market in their evaluation. In fact, they typically want returns that are not correlated to the S&P, or market neutral or based on a proprietary data set without market risk. The bigger they are, the more they care about risk than reward.
  25. That is only one of the several risk related factors of the HFs. If running off to Brazil is one of the major factors then SEC will quickly put in the rule whereby HFs only have trading access to the funds but no ability to withdraw funds and disappear to Brazil or other countries.

    Another risk related factor with HFs is regulations/audit etc. regarding paperwork etc. Many cases out there like Maddoff where HF manager was sending fake statements to investors posting returns that never were gained by the HF.

    Infact SEC should put in such extra "audit and enforcement" tools on HFs and charge then out of their 2/20 fees structures for costs incurred by SEC to safeguard against the slick play.

    In addition to a "hurdle benchmark of returns" to be eligible for incentive pays, SEC should also mandate that if a Fund has gotten too big in size then each $1B under managements needs atleast a minimum number of analytical support to help in both efficient research and operations.

    There are funds out there with several billions under management and having "only" half dozen people doing research and analysis. End result is way sub par returns which are still subjected to 20% or more of incentive fees.
  26. You have statistics on ET small mom and pop retail members that tell you we are not rich?
  27. Hello,

    They have trading systems you can invest in that have beaten the S&P500 by large numbers year after year. You don't have to invest in hedge funds with the hope of bearing the SP by a few percentages..
  28. Yes, I do. I have met a large enough sample of people from ET in person that assuming the distribution is normal (and it is), then there is enough evidence to extrapolate that the sample mean approximates the population mean. Also, please review the post again where I stated "most little guys on ET are not rich". They're not.
  29. Since apparently nobody in this thread including the OP has heard of this fairly new website called google, and Sle gave fairly non-numerical answers (how much is plenty?), let me show off my google fu power:

    1. It depends on how many years we are looking at. The more years the less funds. Over the last 15 years, 92.2% of large-cap funds lagged a simple S&P 500 index fund. The percentages of mid-cap and small-cap funds lagging their benchmarks were even higher: 95.4% and 93.2%, respectively.
    In other words, the odds you’ll do better than an index fund are close to 1 out of 20 when picking an actively-managed domestic equity mutual fund.

    Also: "A barometer of hedge fund performance, called the HFRI Fund Weighted Composite Index, has generated an annualized gain of just 1.7% over the past five years. Compared to that, the S&P 500's average annualized return for the same period was 11%. "

    2. It kind of depends on the market in general. When in a bullmarket, most HFs make money even if less than the market. When in a bear market, most HFs lose money.

    3. 5 years.

    4. See the above answers and interpolate. "two thirds of first time funds never raise another fund again"

    http://www.frouah.com/CQA Presentation.pdf



  30. I used Yahoo to find Google, but as Yahoo is not one of my Favourites since 1999, I had to Google Yahoo first.
  31. The distribution is not "fat tail"?
  32. On ET? Good Lord no. LOL.
  33. Why dont "we" all admit "our" own returns and critical mass AUM isnt tht good, and come together form a "fund" and run it like Dalio suggest seen here ?

  34. But the results you guys are citing here have a tremendous survivorship bias, as do the big hedge fund performance indexes (Barclays, Credit Suisse, etc.).It doesn't account for all the funds that evaporated along the way,
    The road narrows.