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With fees dozens of times higher and still underperforming the market, what exactly are top hedge funds selling? | Bee Network

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With fees dozens of times higher and still underperforming the market, what exactly are top hedge funds selling? | Bee Network Login Tin tức thịnh hành Nền tảng khởi chạy meme Các tác nhân trí tuệ nhân tạo (AI) DeSci TopChainExplorer Dành cho Newbee Tiền xu 100 lần Trò chơi Ong Trang web cần thiết ỨNG DỤNG Phải Có Người nổi tiếng về tiền điện tử DePIN Tân binh cần thiết Máy dò bẫy Công cụ cơ bản Trang web nâng cao Trao đổi Công cụ NFT CHÀO, Đăng xuất Vũ trụ Web3 Trò chơi Ứng dụng phi tập trung (DApp) Tổ ong Nền tảng phát triển QUẢNG CÁO Tìm kiếm Tiếng Anh Nạp xu Đăng nhập Tải xuống Đại học Web3 Trò chơi Ứng dụng phi tập trung (DApp) Tổ ong QUẢNG CÁO trang chủ•Phân tích•With fees dozens of times higher and still underperforming the market, what exactly are top hedge funds selling? With fees dozens of times higher and still underperforming the market, what exactly are top hedge funds selling?Phân tích2 tháng trước更新Wyatt 17.873 18 Original translation by: AididiaoJP, Foresight News

Foreword Many people criticize hedge funds for low returns, but they’ve made a conceptual error. Saying that hedge funds “can’t beat the market” is like comparing a boat to a car and then complaining that the boat is slow at high speed—the comparison is completely wrong.

Buying the S&P 500 index (i.e., the market factor) costs approximately 0.09% annually. Top hedge funds have annual fees of 5%-8% (2/20 fee structure plus various other fees). The cost difference can reach 50-80 times.

If they offered the same thing, then investors would be fools. But they do offer different things, and institutional investors who have invested hundreds of billions aren’t fools either.

They’re buying something that money can’t replicate: factor neutrality, a high Sharpe ratio, and large, uncorrelated sources of returns. Once you understand this, you’ll understand the rationale behind the high fees and stop comparing hedge funds to index funds.

Where does the demand come from? A common criticism is: “The S&P 500 has risen 17% this year, while Citadel has only made 9.3%.” This criticism may hold true for most hedge funds, since many funds are simply packaging market volatility.

This completely misunderstands the product logic of top funds like Citadel, Millennium, and Point72. Their goal is not to outperform the market; that’s not their mission. Comparing a fund designed to have zero correlation with a 100% stock benchmark is as unreasonable as blaming an insurance policy for not making money.

When you manage hundreds of billions in pension funds, $60 billion of that is already in stocks. You don’t lack stock exposure; in fact, you have too many stocks. What you really need are things that will rise when the stock market falls (or at least not fall with it). What you need is risk diversification. More precisely, what you want is something that will rise regardless of the market and outperform cash.

Sounds amazing, right? Thinks it must be expensive? You’re right! True risk diversification is extremely expensive because it’s extremely scarce!

Who are the competitors? The S&P 500’s long-term Sharpe ratio is approximately 0.35-0.5, meaning that for every 1% of volatility experienced, it generates 0.35%-0.5% excess return. Top global hedge funds have Sharpe ratios of 1.5-2.5 or even higher.

We’re talking about companies that have maintained a Sharpe ratio of around 2 for decades, achieving returns unaffected by market volatility, and with significantly lower volatility. These companies experience minimal drawdowns and recover quickly.

Hedge funds are not simply expensive versions of the same product; they are entirely different categories. Top hedge funds offer two advantages that ETFs/index products do not:

Factor neutral High Sharpe Ratio Why is factor neutrality valuable? To understand the value of factor neutrality, look at this formula:

Return = Alpha + Beta × Factor Return + Random Error

Alpha = Benefits from skills Beta = Exposure to systemic factors Factor return = Chợ factor return Random error = Individual differences The beta component can be replicated using publicly available factor combinations. What can be replicated should only incur replication costs. Replication is cheap: market factors 0.03%-0.09%, style factors 0.15%-0.3%.

Alpha is what remains after removing all reproducible components. By bất chấpnition, it cannot be synthesized through factor exposure. This non-reproducibility is the basis of the premium.

Key Insight: Beta is cheap because factor returns are public goods with unlimited capacity. If the market rises by 10%, all holders earn 10%, with no exclusivity. The S&P 500’s returns do not decrease simply because more people are buying.

Alpha is expensive because it’s a zero-sum game with limited capacity. For every $1 of alpha earned, someone loses $1. The number of market inefficiencies that generate alpha is limited and will disappear as capital inflows. Sharp’s strategy at a scale of $100 million might only yield 0.8 at a scale of $10 billion, because large-scale transactions themselves will affect prices.

Factor neutrality (beta ≈ 0 for all systematic exposures) is the only truly unreplicable source of returns. This is why the premium is justified—not because of the returns themselves, but because such returns cannot be obtained through other means.

The magic of a high Sharp ratio The compounding effect of a high Sharpe ratio becomes apparent over time. Two portfolios with the same expected return of 7% but different volatility (16% vs 10%) will have drastically different results after 20 years. The low-volatility portfolio has half the probability of loss and offers much better downside protection.

For organizations that need stable expenditures, this reliability is worth paying for.

Volatility not only affects the investment experience, but mathematically it also erodes long-term returns:

Geometric average return ≈ Arithmetic average return – (Volatility²/2)

This is called “volatility drag,” where high-volatility portfolios will inevitably underperform low-volatility portfolios in the long run, even if the expected returns are the same.

The low-volatility portfolio ultimately earned an extra 48 million, representing a 16% increase in wealth, despite having the same “expected return.” This isn’t a matter of risk preference, but a mathematical fact: volatility erodes wealth over time.

Think like a professional investor Why are institutions willing to pay a 100-fold premium for factor-neutral funds? A look at portfolio mathematics will make it clear.

Let’s assume a standard portfolio: 60% stocks + 40% bonds. Expected return 5%, volatility 10%, Sharpe ratio 0.5. Not bad, but stocks are very risky.

Add 20% to a factor-neutral hedge fund: expected return 10%, volatility 5%, Sharpe ratio 2.0, zero correlation with stocks and bonds. New portfolio: 48% stocks + 32% bonds + 20% hedge fund.

Results: Expected returns rose to 6%, volatility fell to 8%, and Sharpe rose to 0.75 (a 50% increase).

This is just one fund. What if you could find two or three uncorrelated top-tier funds? Now you understand why these types of assets are so valuable.

Institutional investors are scrambling to invest in top-tier funds not because they don’t know index funds are cheap, but because they understand the mathematics of portfolio management. The comparison isn’t about fees, but about the portfolio efficiency gained at those fees.

How to select funds like institutional investors Let’s say you’re looking for products that are close to those of top-tier hedge funds, but you don’t have access to Citadel/Millennium/Point72, yet you have plenty of time to research. How do you filter them?

Pay attention to these key points:

Look at long-term factor exposures: not just the current level, but several years of rolling data. A truly factor-neutral fund should consistently have near-zero exposure to market, sector, and style factors. If the market beta fluctuates around 0.3, that’s factor timing—it might be useful, but it’s not the product you should buy.

Stress test: In a bull market, everyone seems irrelevant. Look at crisis periods: 2008, early 2020, and 2022. If pullbacks move in tandem with the market, it’s not truly neutral; it implies beta exposure.

Looking at long-term Sharpe ratios: a high Sharpe ratio in the short term might be due to luck, but maintaining a high Sharpe ratio in the long term is much harder to achieve through luck. Sharpe ratio is essentially a statistically significant indicator of returns.

Forget about copying: Factor ETFs can give you exposure to factors like value and momentum at an annual cost of 0.15%-0.5%. But these are not the same products. Factor ETFs are correlated with factors, while neutral funds are not. This correlation structure is key. You need to look for actively managed products or alpha strategies.

Understanding scarcity After conducting the above research, you may find that the number of products that fully comply with all standards is zero!

Seriously though, it’s possible to find similar products, but they’re unlikely to be able to accommodate an institution’s capital scale. For a sovereign wealth fund managing trillions, an investment of a few hundred million is meaningless.

Ultimately, you’ll understand: only a very few companies can maintain a Sharpe ratio above 2 across multiple cycles and a scale exceeding 50 billion. This is incredibly difficult. Factor neutrality, large scale, and long-term stability—possessing all three is extremely rare. This scarcity makes the premium reasonable for those who can invest.

at last Paying a 50-100x premium for top-performing factor-neutral hedge funds is backed by solid portfolio mathematics, something critics have overlooked. Institutional investors aren’t stupid; the real problem might be that too many funds charge top fees while offering expensive beta that can be bought for 0.15% per year.

(Note: The fund report already shows the net return after deducting all fees; no further deductions are required.)

Bài viết này được lấy từ internet: With fees dozens of times higher and still underperforming the market, what exactly are top hedge funds selling?

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