Basically the title. Hedge funds underperform every year as compared to broader ETFs like S&P500 by more than 10%! Given this, who invests in hedge funds? Are they stupid or am I stupid?
[https://www.aei.org/carpe-diem/the-sp-500-index-out-performed-hedge-funds-over-the-last-10-years-and-it-wasnt-even-close/](https://www.aei.org/carpe-diem/the-sp-500-index-out-performed-hedge-funds-over-the-last-10-years-and-it-wasnt-even-close/)
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as someone who spent several years at a big box investment firm (not a hedge fund) engaging with institutional investors regularly, the real answer is institutional investors don’t buy returns, they buy “cover-your-ass-ability.”
there are usually 1-4 people as a group making decisions at the final stages of mandates. hedge funds are attractive to these people because 1) they can talk about their alpha (outperformance relative to market) strategy to their bosses, which justifies their expertise and big paycheck (even if that alpha never seems to materialize) and 2) if things blow up, you can deflect some blame on these guys that were supposed to be so damn smart.
lastly, there is a good amount of cachet for some people in meeting/investing with a HF, and you’d be surprised how much that drives decision making sometimes.
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