I'm always happy to read good articles about hedge funds so I'd hate for this comment to come across as a dismissal - it's not. That being said, the uninitiated should be a bit wary of this line, which is a good example of a class of hedge fund commentary that appears a lot:<p><i>hedge funds have consistently underperformed the market in recent years: last year the average hedge fund made 3.3%; S&P 500 index gained 11.4%.</i><p>We're in the late stages of a bull market in equities. Hedge funds are traditionally set up to protect assets or even generate returns in downturns; one of the things you trade away for that safety is full participation in market gains. So I'd expect a canonical, 'good' hedge fund to underperform a bit in an upswing but be flat or potentially even positive in a down market.<p>The article talks a bit in the second half about how hedge funds achieve this - where the 'hedge' comes from - so the insight is there if you think hard about it: you have to pay for the hedge somehow, and it comes out of your upside participation.<p>The reason hedge funds are falling out of favor is more to do with a surfeit of crappy funds, which again the article hints at but is too polite to explain. A lot of that collective underperformance post 2008 is down to a huge population of 'me too' equity long/short funds all following rote strategies. That statistic conceals the limited number of cleverly managed, fast moving funds which were able to take contrary positions in the credit bubble and protect their investor's money by shorting CDSs.<p>All of which is to say, the industry needs a shakeup and maybe this variable fee structure has a role to play. Good luck to them.
I've always struggled to understand why hedge funds exist. As the author points out, the average hedge fund severely underperforms the market while charging a large fee to do so. I was talking with a guy who works at a hedge fund over the weekend and he half-jokingly told me that his hedge fund survived on institutional investments and that most of their clients didn't really care as long as his fund "didn't lose too much money".<p>If you take any finance class anywhere in the world, you are bound to come across the random-walk theory of the stock market, as well as strong, semi-strong, and weak market efficiency theory. The only way to reconcile these theories with the hunt for alpha is through differences in information - aka insider trading. The funds that consistently outperform the market are either 1 in a million lucky (how do you choose this firm as an investor? you don't), or they trade on information that others do not have access to.<p>Insider information is the only logical reason to invest in a hedge fund in my opinion. If you know the managers of fund X are buddies with Janet Yellen, go golfing with fortune 500 CEOs on the weekends, and vacation in Europe with French politicians. Just hope that they aren't the 1/100 that the government decides to make an example out of.<p>Otherwise, as most of my professors have advised, you should just invest in a portfolio of ETFs and only pick stocks for fun with money you aren't afraid to lose.<p>On instavest: So why would I invest with a novice hedge fund manager who has none of these connections, who is competing with the thousands of hyper-intelligent grad students our system churns out into finance every year (rather than underfunded labs and dwindling academic positions), who is just trying to get his name out there placing risky bets in a bubble of a market?
Whereas I like the idea, large hedge funds will still exist and thrive on their fee structure.<p>These rely on a considerable sum of institutional investors, where tipping wouldn't be feasible.
I love the idea here, but I really wonder what incentive people have to tip (especially if it appears others are tipping). It's great that you've measured a ~10% tip rate, I hope it stays up there.<p>But it seems like really fertile ground for a free rider problem. Do you have plans for that if it manifests itself?
I made an account to play around with, I don't have too much money to play with at the moment so I wanted to start with a $50 investment. No dice, this requires a >$1000 initial investment. Maybe when my student loans are paid off I'll come back to this.
Instavest could use a few visualizations for the hedge fund investors like this:<p><a href="http://54.149.66.250/sp500/sp500_visualizations.html" rel="nofollow">http://54.149.66.250/sp500/sp500_visualizations.html</a>
Interesting concept.<p>Here is why I think it might have problems. Most Hedge funds fall into a few categories, almost all of which won't help the average person invest....<p>1) guys who have a great understanding of one very niche area. These types of funds tend to work for a couple of years until the niche goes away, ie you might understand how prefered's work better than anyone else but sooner or later the rest of the market will catch up and your alpha goes away.<p>The average person can't take advantage of this as they won't have the contacts, expertise, legal ability, etc to work in these niches<p>2) market micro structure, these are your HFT and algorithmic guys, you just can't do this on your own so knowing what they do doesn't help you at all.<p>3) the warren buffets, knowing buffet's portfolio doesn't do you any good as buffet gets invited to do deals by the companies themselves at discounts to their current values, ie a company that needs cash will offer Buffet a preferred at a discount that pays a generous return.<p>Again this just doesn't help the average person.<p>4) Funds that just shouldn't have been started, these are your SELL side guys who leave GS or Morgan Stanley to try it on their own and then find out just how hard it is to trade your own money and how cushy they had it trading someone elses money.<p>Again not much help to the average investor.<p>5) Guys who trade esoteric instruments, usually the alphabet soup you have heard of like MBA's, CDO's, etc.<p>The average person can't trade these so it doesn't help them to know what a hedge fund investor is doing here.<p>To be honest the biggest thing that has convinced me that the average person shouldn't invest, and more importantly shouldn't listen to others about what to invest is what I glean from economists.<p>I'm gong to guess that I have access to better economists than 99% of hacker news and if I talk to 100 economists I'll get 50 telling me the market is going down over hte next year and 50 telling me that its gong up. And these are well credentialed people who work for well named companies and government agencies and none of them can agree on anything.<p>If they can't agree, it should let yo know just how much guessing the average person who has "studied the market" is doing.<p>TL/DR Just picking stocks is a very small niche in the hedge fund space as its just really hard to do and the ones who do well at it, often do well due to other factors such as getting in at IPO's, getting restricted stock at discounted prices, etc due to their relationship with sell side firms.<p>Plain old fashioned picking stocks is a crap shoot no matter who you are. Just say no.<p>I'll certainly agree that there is a current glut of funds chasing the same deals.
If people tend to tip 10.3% of profits vs 20% with a traditional fund, how do you attract talent? Higher volume, some kind of efficiency gains, a generally more attractive work environment, etc
The big problem though is behaviorally we e know for certain creative tasks, being motivated by scaled return can cause poor performance. Shouldn't that mean that the right strategy is to give the fund manager 2% flat fee and ditch the 20% (of course that could lead the manager to try to game getting numbers of people into their fund....o