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Comment by jackcosgrove | Hacker News Reader

IANAMM (market mover) but my understanding of hedge funds is that their purpose is principal preservation not growth. When you have a billion dollars to invest, your investments begin to distort markets. Small investors benefit most from the index fund strategy, but it doesn't work as well for institutional investors and wealthy family offices.

Now, I'm sure there are a lot of hedge funds who promise market-beating returns to less savvy investors, who are just cashing in on to the cachet of the industry.

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Different funds will have different mandates, but generally they are trying to beat their benchmark index and charge 2 & 20 for the privilege.

If they can't beat the S&P 500 which I can invest in with Vanguard at 0.07% at relatively low risk, then why would you invest with them?

The main point of a hedge fund is in the name, to act as a hedge. They aren’t, as a rule, meant to be a competitor of SPY.

That's not where the "hedge" comes from, it's called that because they use hedging and other strategies to (hopefully) deliver constantly positive returns, uncorrelated to the market. (Which ironically makes it useless as a hedge, as those should be anti-correlated.)

Absolutely. The real original term was "hedged fund" and not "hedge fund". I can only feel the pain of the guy [0] who invented the term, when he saw that his entire industry dumbed it down.

[0] https://en.wikipedia.org/wiki/Alfred_Winslow_Jones

I mean, this link literally says he coined the term to mean “a fund that is hedged against market risk” so I have no idea what you two are even arguing? A hedge fund is a fund that hedges against volatility and that is always what the name has implied. So my comment is right and you two are wrong even by your own sources.

"hedged fund" implies that the fund itself is hedged. It is the original and correct term (hence the link).

"hedge fund" implies that the fund IS a hedge (presumably against other assets one might own). Except that in and of itself the fund cannot hedge you without knowing what you own.

Nowadays, everything is called a "hedge fund" incorrectly - they should be called "hedged fund" as per the original term. They provide diversification and hopefully some return above CPI, or some well-defined risk-adjusted return.

By the way, "hedging against volatility" doesn't mean much. Most of those funds are short volatility.

No that is most certainly why it’s called a hedge fund because they are a hedge against volatility[1].

Also In what way does being uncorrelated make it useless as a hedge? The implication is that if the market goes down your capital isn’t guaranteed to also lose value at the same rate and thus it is definitely a hedge.

>in sum, hedge funds are called hedge funds because they use a full array of hedging techniques to reduce portfolio volatility.

https://www.imf.org/external/pubs/ft/fandd/2006/06/basics.ht....

As your link says, they're hedged (adjective form), but not hedges. They are supposed to have low volatility themselves, but they don't counteract the volatility of other investments in your portfolio

As a retail investor you should not invest in hedge funds.

VOO and VFIAX (Vanguard's S&P 500 ETF and index fund) have only 0.03% and 0.04% expense ratios respectively.

I'm invested in VUSA ETF through Vanguard UK, but point taken.

> When you have a billion dollars to invest, your investments begin to distort markets.

If you invest in smaller markets, sure. But not eg the S&P500. The sums already involved there are orders of magnitude bigger.

The market is made up of actual buyers and sellers. It's not crazy to soak up all the buys at your broker, not to mention exit paths if you have to move a billion out.

Your broker can route the big order to the exchanges. So that part about the broker is pretty irrelevant.

In any case, you are right that you would want to be careful about moving a billion dollars into S&P500 all at once. But that doesn't mean you shouldn't invest in an index ETF.

So there's a difference in how much your position affects the overall market, and how much getting in and out of the position quickly would affect the overall market.

You can have a look at the daily volumes of the relevant ETF to get an estimate. SPY seems to have a daily volume of dozens of billions of dollar traded. So a single billion over a day might not actually make that much of a difference.

Btw, if you just give the market enough credible warning, you can just route the order via an exchange. People will prepare positions and jostle to be your counterpart.

> you can just route the order via an exchange.

You certainly can, this is just where you start moving the market. If your broker has to make a call for you, the price to fill your orders is dropping fast.

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