The Success of a Comp Structure Masquerading as an Asset Class
I recently came across this article from Financial Times (citing this report from SigTech) making the point that hedge fund managers outnumber Taco Bell managers by a ratio of about 4 to 1. Based on the chart below, there are nearly as many Hedge Funds in this world as there are Starbucks.
Why is this important?
I often write about hedge funds and their persistent underperformance (see The Cost of Volatility) and yet, the industry continues to grow. As it says in this report from SigTech:
Institutional investors have - despite last year’s disappointing performance numbers - a persistently strong appetite for hedge funds, with two thirds of investors expecting to increase their allocations over the coming years.
Individual investors read things like this and think, “if institutional investors are doing it, I should probably do it too.” Unfortunately, irrationally allocating more to hedge funds that have consistently underperformed is not fundamentally different from abandoning a long-term equity strategy to chase a “new era” fad. It is simply a manifestation of fear. One fear is the terror of losing all your money; the other is the terror of everyone getting rich except you. But they’re both fears, and they both lead to the destruction of wealth.
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