While we aren’t generally in the business of highlighting misleading pieces on the web (talk about a job that would never end), we ARE in the business of using blog entries and tweets and many other kinds of data to generate actionable equity research. That means in order to differentiate between good and bad investment opportunities, we have to be able to differentiate between good and bad blog entries.
Last week, Matthew Yglesias (a business writer at Slate.com) wrote that “Investing in Hedge Funds is Terrible.” That’s the actual headline – maybe he can blame that on an editor, but if an editor contributed a headline they really ought to have also contributed, you know, editing.
As a launching point, he uses Josh Brown’s comments on the tremendous difficulty of identifying the best emerging managers and the near-impossibility of getting proven managers to let you into their fund. Brown makes a fair and essential point: it’s hard to isolate signal from noise when looking at fund performance, and by the time you have it sorted out you will likely need tens or hundreds of millions of dollars to gain the attention of a winner.
Unfortunately, Yglesias goes on to say two things that don’t follow at all:
- “So in fee-adjusted terms, you get a negative valuation.” Um, no. Whether you get a negative return when adjusting for fees depends on two things: the return and the fees. Since both returns and fees vary by fund, this is impossible to say in general. He might want to suggest that the industry averages a negative valuation, but that’s about as fair and helpful as saying that Slate.com averages useless reporting.
- The fact that “the guy deciding who to invest with isn’t even investing his own money only makes the field more open for ripoffs.” That might be the case. But this is an issue with the advisors, not with hedge funds. If anything, such agency problems [http://en.wikipedia.org/wiki/Principal%E2%80%93agent_problem] seem like a reason to be sure “the guy deciding who to invest with” IS investing his own money as well. Guess where that happens? Hedge funds.
We aren’t here to defend hedge funds – some are good and some are bad, and some of the good ones are our clients. We’re here to enhance the opportunities available to all investors by “sharing the wealth of information,” and we believe few things are as big an obstacle to getting rich as poor thinking.