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Comment by jmcgough | Hacker News Reader

I think what we're seeing is a significant shift away from actively managed funds to passively managed funds, like index funds. People are becoming more educated about personal finance and are recognizing how much active management fees eat into their returns. There are also much more options than there used to be (e.g. ETFs).

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hedge funds investors on average are large, "qualified", and sophisticated. the money's leaving because they've underperformed (they always do in big bull runs), not because endowments etc have gotten "more educated about personal finance".

You're right, I was thinking actively managed funds in general, not specifically hedge funds.

It's possible that their views on the EMH have changed, too, no?

Some of the underperformance has been attributed to the crackdown in insider trading

unlikely. i think it has more to do with competitive pressures in markets and the elimination of a lot of the less sophisticated participants (partly due to higher frequency trading).

Why would you say it is unlikely?

I think the commenter who stated that it is likely should cite their source. If you make an assertion like that, you should back it up.

While that is true, the guy who said it was unlikely was guilty of the same crime. They both need a "citation needed" response.

I personally remember enough cases like Steven A Cohen and Galleon and the Gerson-Lehrman group[0], that I assign the probability "likely" to that claim, so if someone says "unlikely" I ask him for his reasoning because I might need to update my estimates. I was not trying to say it is wrong, just understand his reasoning.

[0] https://en.wikipedia.org/wiki/Gerson_Lehrman_Group#Controver...

> the crackdown in insider trading

Which, in reality, was the SEC and Preet Bharara trying to say that large investors aren't allowed to have meetings with the execs and investor relations people at the companies that they were large investors in, which doesn't make much sense and was knocked down by the courts.

in reality

There was a lot more to "reality" than you make it out to be. E.g. there's this clown https://en.wikipedia.org/wiki/Raj_Rajaratnam#Conviction_and_... and 13 of his buddies who were all convicted and who are doing time.

And don't forget about Stevie Cohen https://en.wikipedia.org/wiki/Steven_A._Cohen#Controversy who managed to skate personally but whose hedge fund pleaded guilty to criminal charges and agreed to a $1.8 billion settlement.

> People are becoming more educated about personal finance and are recognizing how much active management fees eat into their returns.

Do you have a source that supports what this implies?

Everything I've run across for years now indicates it's a combination of Dunn's law and annoyance with fees driving the shift.

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"Fees matter. That is the overarching sentiment that emerged from an online Wall Street Journal survey asking readers about their investment style and satisfaction as part of the Journal’s series looking at the rise of passive, or index-based, investing."

http://www.wsj.com/articles/readers-react-low-fees-are-drivi...

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"Lower fees, as opposed to better performance, may be the big reason more investors are switching from active to passive. Morningstar found the investors in active funds improved their odds of beating passive funds by favoring funds with lower-than-average expense ratios."

"It's not so much about active versus passive as it is about fees," Morningstar's Johnson said.

http://www.cnbc.com/2016/08/29/investors-say-forget-it-to-ac...

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And this has been going on for ten years, which implies a sustained shift of understanding rather than a blip:

http://www.wsj.com/graphics/passive-investing-five-charts/

The people that invest in hedge funds are, by definition, sophisticated investors. I don't buy the idea that they didn't understand the implications of a "two and twenty" fee structure until recently.

What you have said is certainly true for the average retail investor that simply isn't legally allowed to invest in a hedge fund, of course.

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