At the end of each quarter, hedge fund managers who have more than $100 million in assets under management have to reveal their portfolio positions within 45 days as part of their 13F filing to the SEC. The deadline for the third quarter of 2020 reports was November 15th.

These hedge funds are not cheap. The vast majority of these funds charge both a management fee (2% to 4%  of assets annually, 2% being standard) and a performance fee (typically 20% of the fund’s profits every year). And so, the hedge fund managers have to outperform the major indices in order to justify the high fees. A few quarters of underperformance means the investor will likely go to another fund manager or can just invest in a plain vanilla S&P ETF and pay a lot less in fees.

Looking at the top 20 hedge funds in terms of performance, a few recurring themes emerged. Many of them invested in names we are all very familiar with – Amazon, Microsoft, Facebook, Tesla, Zoom, Visa, Paypal etc. Some even have the Nasdaq index ETF – QQQ as their biggest position. Why then, we ask, do we have to pay exorbitant fees to get a return, net of fees, which may not be much different from investing in an index?

Future Wealth’s View

If you have not noticed already, the hedge fund industry is on its way to extinction. And the simple reason is that they are increasingly finding it difficult to discover companies that can provide the kinds of returns that justify charging outrageous fees. In my own days as an equity analyst years ago, unearthing valuable information on a company meant traveling to meet in person – company’s suppliers in China, its customers in the US and its distributors in Europe and Asia. And then triangulating that information with the company’s own results and guidance to arrive at a thesis that would then drive buy or sell decisions on the company’s stock. With Covid and all travel grounded to a halt, it is all but impossible for these fund managers to do any kind of diligence on any company. And so, many simply buy the same stocks that everyone else buys and at the end of the quarter, have either produced performance inline with the S&P index or ended up worse.

Covid or not, the hedge fund industry will ultimately go the way of cassette tapes and will likely take the mutual fund industry along with it. The advent of ETFs has enabled the average investor to reap the benefits of the stock market without throwing money at these fund managers. The challenge for the average investor is to understand the stock market dynamics – where to invest and when to pull back. This is where we, at Future Wealth, have come to play an important role.