An article in Bloomberg yesterday announced that Citadel hired a quant group from a shuttered hedge fund, Hutchin Hill Capital. Citadel is known for making hires from failed hedge funds. But why hire people from a fund that was going ‘OOB’ (“out of business,” as an old friend and I used to say about neighborhood places in Lincoln Park)?
One way to understand hedge funds is to realize they are – quite obviously – not about superior investment performance. Most hedge funds … well, they suck. They charge enormous fees to deliver performance that consistently underperforms passive (and super inexpensive) index funds.
As I’ve written before, my kids (kindergarten, 4th grade, and 7th grade) like to keep their 529 savings in S&P500 index funds. And they’ve crushed Citadel and most other hedge funds most every year since doing so. So … grade schoolers, on one hand … geniuses (and they really are) on the other hand … and … grade schoolers win, while playing soccer and field hockey and playing with American Girl dolls and not giving a thought to stocks all year.
But there is a difference between my kids and hedge fund investors: my kids are in it to win it. They have big dreams for their educations. Money matters to them. They want PERFORMANCE. So they invest passively.
But the Harvard and Yale endowments? The Illinois State Teachers Retirement System? Middle Eastern sheiks and Russian oligarchs? They want something else. They want to go to the shiny casino. And hedge fund managers are great at building casinos.
People go to casinos because they think they can make some easy money. And, gosh darn’t, they are so shiny:
Hedge funds build their casinos differently: hiring lots of people with a proven inability to beat the market, but who look so darn smart:
Let’s say the guy on the right has a Ph.D. from Berkeley in Statistics and the guy on the left has a maths Ph.D. from Harvard. How could they not beat the market? I mean … math is hard, right?
If you are a hedge fund investor, you are most likely falling prey to the shiny lights and pretty things the hedge fund managers like to dangle in front of you. “Quants”, “Algos”, “HFT”, etc. Those are the Elvis-impersonators and Gold Fountains of Hedge Fund Land.
The proof is in the pudding. And that pudding has tasted pretty awful for a long time.
You don’t want to be this guy.
If you are managing other people’s money, think about what you are doing. Are you confident you are satisfying your fiduciary obligations?
If you are investing your own money, have fun! But don’t confuse gambling for entertainment with investing intelligently.
And remember, what’s paid in Hedge Fund Land, often stays in Hedge Fund Land.