Hedge funds vs. darts

July 5, 2012

By Matthew Goldstein

The Wall Street Journal used to run a feature in which some of its staffers would periodically pick stocks by throwing darts against a target. The idea was to see how many times stock picking by pure chance could outperform the picks of a bunch of experts.

The WSJ ended the popular feature several years ago but maybe it’s time from someone to bring it back and this time use darts to try to outperform some of top hedge funds managers. That’s because with the average hedge fund up about 1.2% during the first-half of the year, it would seem an investor on his or her own could do just as well picking stocks blindfolded.

Indeed, with the S&P500 up about 8 percent for the first half, the 3.7% gain for David Einhorn’s Greenlight Capital and the 3.9% gain for Dan Loeb’s Third Point don’t look so robust on second glance.

Sure, Einhorn and Loeb are beating a lot of their peers. And they are certainly doing better than John Paulson, who is well on his way to another losing year in his biggest fund. But for all the ink we in the media spill on hedge fund managers, you’d think more would be knocking it out of the park. (Sorry, David your 3rd place finish in the World Series of Poker was great but doesn’t count).

Now to be fair, hedge fund managers don’t just buy stocks like mutual funds. They also short them and buy plenty of other securities. In theory, hedge fund managers aren’t supposed to “kill it” with outsized performance in a given year, but “kill it” by making money for their investors in both good and bad market environments.

So if a manager is up about 4 percent for the year—after those hefty fees–one could argue the managers are doing what they are supposed to.

But as my colleague Svea Herbst Bayliss points out in her story on first-half performance, it does make you wonder whether pension funds seeking higher yields are smart to be moving more boldly into costly hedge funds. That’s especially so when there are so many lower cost alternatives–like some plain vanilla index fund.

Darts anyone?



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