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Hedge Funds Aren’t Designed to “Make you Rich”

Noah Smith says hedge funds don’t make you rich.  Well, isn’t that obvious!  After all, they don’t call them “hedge funds” because they’re “get rich funds”.  In fact, a more appropriate term for “hedge fund” is probably “protect your wealth fund”.  After all, that’s what “hedging” is really all about.  Unfortunately, lots of hedge funds catch the media’s attention for their “market beating” performance.  But who knows if those funds are actually achieving anything special.  For all we know they could be taking more risk to achieve a better market return.  But who really cares?  If you buy into a “hedge fund” because you’re looking to “get rich” then you’ve kind of missed the whole point to begin with.

The point is (or should be) “hedge funds” are called “hedge” funds because they’re just one style of asset allocators designed to help you allocate your savings in a way that will help you achieve your financial goals.   In many cases their flexibility and access to unregulated strategies gives the portfolio manager access to superior ways to build a diversified portfolio and “hedge” potential risks.  Unfortunately, hedge funds have really changed over time and they’ve started to more closely resemble closet index funds.  In fact, as I show in my upcoming book, hedge funds are starting to look a lot more like mutual funds in that they’re basically just index funds by a different name.

As Noah rightly points out, there’s some debate as to whether hedge funds actually achieve what they claim they can achieve.  After all, most hedge funds aren’t even doing any sort of hedging any longer.  But that doesn’t mean that we should throw the whole industry under the bus.  There are lots of problems with “hedge funds” as  a whole and I generally agree with the idea that hedge funds are way too expensive and in 9 cases out of 10 probably aren’t worth what they claim.  But when we create a strawman to bring down the entire industry it does a disservice to the entire concept of allocating our savings.  After all, hedge funds aren’t where you “get rich”.  In fact, the secondary market isn’t where you “get rich”.  So demonizing “hedge funds” for something they were never designed to do doesn’t help anyone make sense of this muddled world of money.

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