Common Sense Hedge Fund – Performance Worse than the Prostitution

A hedge fund manager right here in Portland, Oregon was recently arrested for soliciting a prostitute.

On top of that, many of the hedge fund’s clients are now pulling out their money. This company had roughly $3.2 billion under management – a huge amount of money that translates into the hedge fund manager making an outrageous amount of money (for themselves – not necessarily for their investors).

I know a lot of extremely successful and competent investment advisory firms that are nowhere near having $3.2 billion under management. Plus, hedge funds generally charge higher fees than your average investment adviser.

So let’s see what the clients of this hedge fund got in return for parking their money there.

I dug up a report from the University of Toledo Foundation, which owned some of the Common Sense Long Biased Offshore Fund.

as of March 31, 2013 the performance was

1 yr                                                     4.9%

3 yr                                                     3.4%

Since inception (May 2008)        1.3%

For comparison purposes, I’ve put the 1 yr, 3 yr and since May 2008 performance of three  mutual funds from Dimensional Fund Advisors. These are globally diversified funds – so simple that you can have your entire investment portfolio made of a single fund. They go from high risk (100% stock) to low risk (25% stock).

Allocation                         100% Stock        60% Stock           25% Stock

1 yr                                      13.85%                    9.75%                  5.49%

3 yr                                     10.20%                    8.34%                   5.58%

since 5/2008                    3.65%                      4.79%                    4.75%

So the very simple, low cost, no drama mutual fund beats this hedge fund over every time period and for every risk level. It doesn’t matter if you were being aggressive or conservative, or invested one year ago or three years ago. This hedge fund was always worse.

Hedge fund guys always come back with the argument that they are “non-correlated” with other stock-market based investments. They can make this argument sound intelligent, but it is usually just a last gasp desparation excuse to explain why they underperform other, simpler investments.

….Then again I suppose they are non-correlated from a certain perspective. Their performance isn’t like a regular market investment – it is always worse.

It just baffles me how these funds manage to raise billions of dollars from high net worth and institutional investors. Well, just because other rich people do it doesn’t mean you have to take part in this self-flagellation as well.