When "More" Isn't "Better"

Here’s a factoid that might shake you out of your leftover turkey-tryptophan stupor: You’re better off putting money in an index fund than a hedge fund.

That was the most interesting tidbit to emerge over the long holiday weekend: “Occupy Wal-Mart” was a bust. “Black Friday” sales improved on last year — barely. And Greece was fixed for the umpteenth time. Thus, the euro soared on Friday, and the dollar got stomped — which drove up stocks and precious metals alike.

According to a Goldman Sachs report, a mere 13% of hedge funds have outperformed the S&P 500 during 2012. A fifth of hedge funds are in the red. For the record, the S&P is up 14% year to date. The average hedge fund is up only 6%.

For “2 and 20” — handing over 2% of assets and 20% of profits to the fund manager — you’d expect better.

The Goldman report blames a host of factors — among them, timid managers still spooked by 2008 and low interest rates leading to high correlations between stocks, bonds, gold and currencies.

We’d suggest another cause: Hedge funds have proliferated to the point that collectively they can no longer outperform the market. At the dawn of the new millennium, there were fewer than 4,000 hedge funds. As of two years ago, there were more than 9,000. As Bill Bonner has been wont to point out lately, “more” does not always equate with “better.”

Dave Gonigam

The preceding article was excerpted from Agora Finacial’s 5 Min. Forecast. To read the entire episode, please feel free to do so here.

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