Can A Monkey Beat A Hedge Fund? New Study Reveals Disturbing Stats


When you choose a hedge fund you do more than choose a firm with a solid history, you choose a professional broker with an impressive resume who will wine and dine you and take all of your investment concerns away. “You’re in good hands,” they’ll assure you. And you’ll believe them.

Alas, after analyzing a broad sample of 1,300 funds-of-funds from 1994 through 2009, Benoit Dewaele, Hugues Pirotte, Nils Tuchschmid and Erik Wallerstein published their disturbing findings.

Harvard MBAs vs. Monkeys

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Their goal was to find out just how much value brokers actually created. The found, when you strip out the firms’ fees, just 22% delivered any “alpha,” or risk-adjusted investment gains, at all.

Better yet, they posed this question: How many firms added value (risk-adjusted returns above those of the underlying hedge-fund indices) by picking the right managers, and avoiding the wrong ones?

Answer: After deducting fees, only 5.7%.

This finding has led Brett Arends of MarketWatch to conclude a bunch of monkeys stolen from a zoo would do a better job than MBAs from Harvard.

“You couldn’t make it up. Nearly half of all Fund of Hedge Fund managers, the academics report, delivered “negative after-fees alpha when benchmarked against the hedge-fund indices.” In other words they couldn’t even keep up with the index.”

More Findings

You’ll notice the findings were calculated after deducting fees. That’s because the typically high fees associated with funds of hedge funds often cancel out out any added value.

Arends reports “As Ilia Dichev at Emory University and Gwen Yu at Harvard found, after looking at hedge-fund performances over the past 30 years, the average has done worse than a stock-market index fund — and not much better than a simple basket of Treasury bonds.”

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