As the hedge fund market grows by 10x, its all but certain returns will decline. The economy isn't a zero sum game but when investment funds grow faster than investment opportunities, logic dictates that median performance will fall and there will be more absolute losers.
Furthermore, picking a hedge fund manager becomes an exercise in futility as the number of managers increase. The pension fund administrator can pick the 1 in 10 stocks he believes will return 15% per annum or he can pick the 1 in 20 hedge fund managers he believes will return 15% per annum. (The numbers here are made up but I hope you see my point).
Either way, the pension fund administrator will need to research on where to park money, but I'd argue the variables to predict future performance are much more transparent with stocks than with hedge funds. All the administrator has done is transformed the problem of picking a winning stock, to picking a winning hedge fund. The only difference being the hedge fund is guaranteed to take a cut of your money.
Hedge funds across the board lost more money since that post came out. Its hard to tell exact performance on the bet though since they don't disclose exactly which hedge funds are in the basket being evaluated for the bet.
To give a sense of how bad it's been, one of the top hedge funds, led by John Paulson who made a few billion dollars by betting contrarian during the subprime crisis, lost 52% in one of his funds this year.
There are advisors and fund of funds just to hedge your bet on hedge funds - and like you said - it's only going to get harder. Picking a hedge fund is going to be like picking the next hot pharma company.
Well that's more or less what tese things are. Instead of investing in a startup, your effectively betting that a group of money managers will hit pay-dirt with a unique investment strategy. For te most part only people with so much money they can afford to risk a pile can even play
http://longbets.org/362/
As the hedge fund market grows by 10x, its all but certain returns will decline. The economy isn't a zero sum game but when investment funds grow faster than investment opportunities, logic dictates that median performance will fall and there will be more absolute losers.
Furthermore, picking a hedge fund manager becomes an exercise in futility as the number of managers increase. The pension fund administrator can pick the 1 in 10 stocks he believes will return 15% per annum or he can pick the 1 in 20 hedge fund managers he believes will return 15% per annum. (The numbers here are made up but I hope you see my point).
Either way, the pension fund administrator will need to research on where to park money, but I'd argue the variables to predict future performance are much more transparent with stocks than with hedge funds. All the administrator has done is transformed the problem of picking a winning stock, to picking a winning hedge fund. The only difference being the hedge fund is guaranteed to take a cut of your money.