> "Any significantly above market returns of any kind are either a scam or have risks that are either not understood or not disclosed."
By definition, the market return is an average, and there must be returns above and below the average. You could say above market returns require taking above market risk, but often times the level of risk you are taking is not known for certain at the point in time you make the investment.
Also, the hedge fund industry's goal is not necessarily to beat the market, it is to provide the highest level of return per unit of risk.
> Also, the hedge fund industry's goal is not necessarily to beat the market, it is to provide the highest level of return per unit of risk.
This is every investment, not judge hedge funds. Every asset has a risk profile. Generally speaking, the higher the risk, the higher the return.
US government T-bonds have a low return because they're viewed as essentially risk-free. Put another way: the US government has never defaulted on a debt and that debt is backed by the US government. It's not that a default can't happen but if it does, we probably have larger problems. So low-risk, relatively low return.
Individual stocks on the other hand have much higher risk. So the return can be much greater but you can also lose all your money.
Funds reduce risk by splitting investments across a pool of assets. This reduces risk but also reduces likely returns (both positive and negative).
When people compare actively managed funds (including hedge funds) to passive funds (eg S&P 500 weighted fund), actively managed funds overall underperform passive funds for the same asset classes and risk profile.
That means you compare an equity hedge fund to other equity funds. This also means whenever we talk about average returns we actually mean average returns for that risk profile and asset class.
This isn’t true, the US has defaulted or suspended payment multiple times going back to the Revolution when it was the Continental Congress, the War of 1812, the Civil War, and more recently in the 20th century through many artful disguises to avoid technical default.
> By definition, the market return is an average, and there must be returns above and below the average.
Agree, but those returns well above average, could be tomorrow's well below average. (And the ones well below average today were yesterday's well above average.)
So it can still be the case that the ones significantly above market and significantly below market are one and the same.
Better put, since a peak can't be predicted, is that a fund with outsize performance last year will likely underperform this year.
I remember Janus' ads running a victory lap about one fund with a >100% return in 2000, only to have ads talking about how to stay strong and deal with "uncertainty" or something after the crash.
> the hedge fund industry's goal is not necessarily to beat the market, it is to provide the highest level of return per unit of risk.
So basically you are saying a hedge fund is just optimizing for sharpe.
That is not true. Sharpe is just one way to compare performance at the same level of vol. It's a useful metric but very limited. It tell you nothing about exposure, risk and distribution.
I discussed how hedge funds position themselves here:
By definition, the market return is an average, and there must be returns above and below the average. You could say above market returns require taking above market risk, but often times the level of risk you are taking is not known for certain at the point in time you make the investment.
Also, the hedge fund industry's goal is not necessarily to beat the market, it is to provide the highest level of return per unit of risk.