When people in the financial industry talk about institutional investors, they're often referring to pension plans. Pension managers oversee some of the largest portfolios of assets in the financial market, and they attract the interest of sophisticated investment managers and hedge funds, each of whom want a slice of that multi-billion-dollar pie.
Hedge funds market their appeal based on sophistication. They offer strategies that promise to outpace the returns offered by the benchmark indexes. Many hedge fund managers also seek to provide gains during falling markets.
But hedge funds are notorious for their exorbitant fees. That's the price investors pay to access a higher level of expertise and acumen—or so these managers say.
How well do hedge funds and sophisticated money managers make good on their promises? This article answers that question with an emphatic "no", citing research that found the performance of hedge funds hired by pension managers lagged the plan's overall performance. Moreover, these funds charged nearly as much in fees as they failed to deliver in performance, to the tune of over $15 billion.
The takeaway for individual investors is to be wary of sales pitches from sophisticated money managers and skeptical of claims of outperformance. Even the most savvy and largest investors often fall for their unfulfilled and costly promises. Remember, It's impossible for anyone "beat" market, and those claiming to do so are bound to lose sooner or later.