Another week, another hedge fund closure. Tourbillon Capital Partners, announced that it is closing his main fund after losses, acknowledging what many knew already – that the hedge fund model is broken. Tourbillion plans to return the more than $1 billion to investors at the end of the year. This follows the closure of Balyasny Asset Management which shut down after it had lost all of its outside capital and shrunk to no more than $150 million in assets. Dmitry Balyasny, who created the hedge fund during the financial crisis to trade on his best ideas, closed it after poor performance this year. San Francisco-based Criterion Capital Management’s and Boston-based Highfields Capital Management’s decision to give its clients’ money back, again as a result of poor performance, only highlights the difficulty in making the hedge fund model work. Hedge funds, which manage $3.2 trillion and charge among the highest fees, have been blighted by years of mediocre performance, finally causing investors to run for the exits.
Where does all this money go? Into low cost index funds and ETFs.
Future Wealth’s View
Warren Buffett has long proposed a simple theory of investing – put your money in low cost index funds and go away. Buffett is such a huge believer in index funds that in 2007, he wagered $1 million that the Vanguard S&P 500 index fund would outperform a portfolio of actively managed hedge funds over 10 years when all fees and expenses were included. The bet ended in 2017 with Buffett’s index fund trouncing a portfolio of hedge funds with an annual gain of 8.49%, while the five hedge funds averaged an annual gain of a meager 3%.
The same theory could also be extended to the advisory model that many of the big banks have adopted. While the fees charged by these big banks are nowhere near the hedge funds, the stock selection adopted by financial advisors is equally esoteric and leaves the investors confused and poorer. At Future Wealth, our thesis mirrors the Warren Buffett approach wherein we invest in a basket of low cost index ETFs for our clients and stay away from attempting to time the market or searching for the most undervalued, undiscovered stock. The low cost index ETF industry is the Amazon equivalent of retail stores for hedge funds – You can choose to stay open but people will simply stop coming and go elsewhere.