Why Hedge Fund Investors Are Like Monty Python’s Black Knight
November 12, 2020

Why Hedge Fund Investors Are Like Monty Python’s Black Knight

Plenty of people joke that it’s tough to make Canadians mad. They’re reputed to be tolerant and polite. My wife and I once stayed at a B&B in Victoria, British Columbia. We ate breakfast with two young guys from California. “Canadians are so nice,” they said. “In fact, today our main goal is to see if we can piss someone off.”

“That shouldn’t be hard,” I laughed. “Canadian tempers are much shorter than you think.”

Earlier this year, I wrote a story about hedge funds for Canada’s national newspaper. After it was published, I received a few angry emails from people who, I assumed, were hedge fund investors. They didn’t like it when I said hedge funds are far more show than go.

They argued that hedge funds protect investors when markets fall. Their managers can short the market or tactically move money into “alternative investments.” One reader said, “Wait until hedge funds publish their latest results. You’ll see how well they navigated this year’s market volatility.” They referred to the dips and rises caused by COVID-19.

Canadian and American hedge fund investors likely share the same false hopes. Most might not know that Vanguard’s Balanced Index fund (60% U.S. stocks, 40% U.S. bonds) beat most hedge funds in 2008. That was the worst market year since 1931. In fact, a balanced index thrashed most hedge funds every year between 2002 and 2019. That’s 17 years of bad performance in a row. Yet, plenty of hedge fund investors still believe they’re in the fight.

That reminds me of a scene from Monty Python’s Holy Grail. If you haven’t seen it, you can watch it here.

King Arthur approaches a knight who won’t let him pass. They fight, and Arthur chops off the knight’s arm. “Tis but a scratch,” says the knight, and he insists they keep fighting. King Arthur is shocked. He chops off the guy’s other arm. But still, the knight won’t quit. “[It’s] just a flesh wound,” he says.

Venn Diagram of Very Expensive, Don't Work Very Well, Rich People Love Them
Creator: Carl Richards

Plenty of hedge fund investors maintain similar false hopes. And we’re talking about a lot of money. According to the HFR Global Hedge Fund Industry Report, the hedge fund industry surpassed $1 trillion for the first time in 2017. In July 2020, it hit $3.177 trillion.

I don’t understand this level of hope or acceptance. If somebody invested $10,000 in the average surviving hedge fund in January 2003 it would have grown to just $13,425 by November 3, 2020. After inflation, they didn’t make a penny. If the same $10,000 were invested in Vanguard’s Balanced Index Fund (VBIAX), it would have grown to $41,552 over the same time period.

And no, hedge funds didn’t draw from magic when stocks fell this year. From January 2020 to November 3, 2020, the HFRX Hedge Fund Index gained just 1.84 percent. That compares to a gain of 6.4 percent for U.S. stocks, 3.92 percent for global stocks, 7.39 percent for a balanced stock index and 7.03 percent for a broad U.S. bond market index.

This brings me back to the Canadian story I wrote back in April. That country’s hedge funds have continued to disappoint, much like those in the United States. I’ll soon write a sequel to bring those readers up to speed. And my advice remains the same. Investors maximize their odds of success with a diversified portfolio of low-cost index funds.

They shouldn’t give their money to a knight who talks a big line…but simply can’t fight.

Hedge Funds Lose To A Balanced Index Every Year January 2003 – November 3, 2020

Year Hedge Fund Returns Vanguard Balanced Index Fund Returns
2003 13.40% 20.02%
2004 2.70% 10.66%
2005 2.70% 4.65%
2006 9.30% 11.02%
2007 4.20% 6.16%
2008 -23.30% -22.21%
2009 13.40% 20.05%
2010 5.20% 13.13%
2011 -8.80% 4.14%
2012 3.51% 11.33%
2013 6.72% 17.91%
2014 -0.58% 9.84%
2015 -3.64% 0.37%
2016 0.86% 8.63%
2017 0.73% 13.75%
2018 -6.70% -2.97%
2019 8.62% 21.67%
2020 (to 11/3/20) 1.84% 7.39%
How $10,000 Would Have Grown $13,425 $41,552

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This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.

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