Why don't we turn the academic literature then. There, failures are just as interesting as successes.
Unlike pension fund and mutual fund managers, hedge fund managers face no legal requirement to diversify, and may instead ‘‘bet the farm’’ on target firms. Taking large stakes in few firms encourages them to become involved in firm management (Brav et al. 2008a).
Unlike pension fund and mutual fund managers, hedge fund managers face no legal requirement to diversify, and may instead ‘‘bet the farm’’ on target firms. Taking large stakes in few firms encourages them to become involved in firm management (Brav et al. 2008a).
However, would that explain all the variance? Possibly. But it's not the only nor most parsimonious explanation.
Hedge funds are also able to engage in investment strategies that make them different in kind from institutional investors. In addition to selling short, a hedge fund might purposefully engage in actions intended to decrease a company’s stock value. For example, at Lowe’s Corporation (Anson 2002a) and Dura Auto Systems (Grossman and Nussel 2008), hedge funds purchased sufficient distressed debt of the troubled firms to compel their executives to declare bankruptcy, then transformed them from public to private companies, with other investors largely losing their equity in the process.
Say you picked the highest return indexes - generally emerging country indexes' risky industries. Consider what activists could do to those kinds of firms? Suddenly those indexes's businesses don't look so solid anymore..
But a conclusion in 'Marguerite Schneider and Lori Verstegen Ryan's "A review of hedge funds and their investor activism: do they help or hurt other equity investors?" where these quotes come from, is that hedge funds tend to be even more activist than be explained by that background noise. That suggests there is some sense in activism, at least among institutions (if regular high net worth individuals pooled their funds they might very well fuck up without great proxy advisors)
If activism among hedge funds in general is high, than the fact that the average hedgefund does not beat the S&P 500, suggests that the claim that actvist hedge forms outperfom the S&P 500 is less likely to be true.
An easy win for rationalists is to avoid actively managed mutual funds. As a NYT article points out:
"High fees, often hidden from view, are still enriching many advisers and financial services companies at the expense of ordinary people who are struggling to salt away savings....even for retirement accounts that are to be covered by the rules, many advisers are not required to act in their clients’ best interests. This means that they are legally entitled to look out for themselves first and recommend investments with higher fees, to the detriment of those who have asked for help....even when fund managers succeed in outperforming their peers in one year, they cannot easily repeat the feat in successive years, as many studies have shown. That’s why low-cost index funds, which merely mirror the performance of the market and don’t try to beat it, make a great deal of sense as a core investment....With fees included, the average actively managed fund in each of 29 asset categories — from those that invest in various sizes and styles of stocks to those that hold fixed-income instruments like government or municipal bonds — underperformed its benchmark over the decade through December. In other words, index funds outperformed the average actively managed fund in every single category....Investors who believe they have found honest and skillful advisers may still want to understand all of this. Not everyone truly has your best interest at heart."