Make no mistake, the 2 and 20 crowd are having a rough go of it lately.
As we reminded readers [5] in the wake of Nassim Taleb’s massive $1.1 billion payday on August 24, hedge funds are supposed to “hedge” - i.e. guard against all manner of black swans, tail risks, six sigma events, and other things that statistically speaking aren’t supposed to happen but in today’s broken markets occur with alarming frequency - but instead they merely “ride the beta train with the most leverage possible, hoping that the Fed will prevent any events that actually need hedging, and blow up in a fiery crash any time the market tumbles.”
For those who need a refresher, here’s how some of the more prominent funds had performed through August 21:
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Indeed, even the zen master himself, Ray Dalio, isn't immune as the $80 billion "All Weather" fund recently found itself caught in the rain with no umbrella after an utter breakdown in the historical relationships between asset classes (volatilities and correlations) that are used to construct optimal "risk-parity" led to what Dalio called a "lousy" August that saw the fund down more than 4%.
The bottom line, as Goldman succinctly put it last month, is that "hedge funds are on pace to lag the market index for the seventh straight year in 2015," suggesting that you'd be far better off paying 0 and 0 for SPY and calling it a day than you would paying 2 and 20 especially considering you're relying on the Fed put either way.
For anyone still not convinced, we present the following chart from Citi's Matt King which sums up all of the above in just about the most straightforward, idiot proof manner imaginable by simply comparing hedge fund returns to a 50/50 mix of stocks and HY credit. Put simply, if you had bought SPY and JNK four years ago for a gross expense ratio of just 0.10% and 0.40%, respectively, not only would you would have saved yourself quite a bit of money, you'd have better performance as well.
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Summing up...
