Hedge Funds Are Terrible Investments. So Why Do Rich People Keep Using Them? - How Money Works

In 2008 Warren Buffett made a bet for 1 million dollars that a hand selected group of hedge funds could not outperform the S&P 500 Index over a ten year period.

In 2018, Buffett won the bet, and went home an extra million dollars richer (which I am sure was a very big deal for him)

This exposed a big flaw in the investment industry which is that actively managed funds and in particular hedge funds struggle to outperform the general market.

When fees are considered there is only a handful of funds that have returned money to their investors in excess of what they would have received had those investors just taken a more traditional investment approach.

#HedgeFunds #Investing #HowMoneyWorks

Music by Epidemic Sound

Stock footage by Story Blocks

[sportsfan]

I've audited hedge funds for a living and while I don't disagree with what you said, the single biggest reason I saw wealthy individuals invest in hedge funds was to protect their wealth from lawsuits and creditors. A massive amount of the investors were actually irrevocable trusts. They care far more about hiding their money from lawsuits than the diversification of their returns.

[martinlutherkingjr.]

TLDR: A hedge fund is supposed to “hedge” against market downside, not to outperform the market every year.

[supermonkeyqwerty]

0:11
You're missing a lot of the beauty behind the story :)
Buffet and his adversary put up a million dollars in the form of treasury bonds, and that money would go to the _charity_ of the winner's choice after the 10 year bet.
The best part? Because of the financial crisis, those bonds outperformed BOTH the S&P and the hedge funds!

[Anonymous-ldje]

It's also a status thing... when I was in business school, I had a professor that formerly worked in the industry explain that the huge fees clients had to pay and net worth requirements they had to meet were a sort of badge of honor. They could brag on the golf course about which hedge fund(s) they were invested in.

[stapleman]

Warren Buffett wins a $1, 000, 000: The most valuable thing to Warren Buffett was that he was right, he could care less about the bet money. Because he made WAY more money living his bet premise than winning the bet.

[inmortal]

thank you so much I've been trying to understand this and get an unbiased answer regarding Hedge funds for years now, it makes complete sense now

[ziksy]

You mentioned Ray Dalio. His whole deal is making "all weather portfolios". When you look at his returns, he doesn't beat the index, but it does more or less match it in the long run. The difference is his portfolio doesn't have volatility. He doesn't get caught up in bubbles and busts.

[FinancialShinanigan]

Rich people don't usually invest to outperform the market, they want to preserve what they have so if hedge funds still grow enough to beat inflation, it's all fine to them.

[Dyllon]

Your description of risk is very simplistic. Every investor, including diversified mutual funds, are supposed to optimizing for return given a certain amount of risk. Risk in this case is actually a terrible term since most of the time this just means standard deviation and is farm more precise than most people realize.

[ijchua]

"Having uncorrelated assets means that something will always be doing well while something else is doing poorly." — you have confused "uncorrelated" for "negatively correlated". When assets are uncorrelated, one could be flat, negative, positive, or anything in between while the other is doing well. One reason is because correlation cannot be measured at a spot, but over a number of samples.

[theinfodump]

Hedge funds also have a really troubling component of luring in union and pension investors and seeing a video about that would be cool.

[dimitrimichaux]

Patrick Boyle really is great! I really like all of his videos, they sparked an interest in economics in me.

[dr.j]

The $1, 000, 000 bet was for charity; Buffet did not keep the money.

[lightxgrenade]

Love your vids and thanks for shouting out Patrick Boyle, I love his videos and sense of humor. Like you said, criminally underrated.

[mageover]

Hedge funds, hedge their bets. It's almost like it's in the name.

[leemarty]

I am seeking some investment guidance. It seems like I am never able to identify trends, options always go against me, and I can't utilize scanners efficiently. I am looking for a simple reproducible passive income strategy that supplements my income and eventually replace my wage income.

[Viviko]

Wait the SEC wants to protect the average investor from dubious financiers with high fees? Well, I guess they forgot the 401K industry. Or is that not high enough fees for barely giving any returns.

[dmonleon]

Guys hedge funds are not supposed to match the s&p 500, they are okay with underperforming the s&p 500 because they are hedging out a lot of risk

[bolt]

I heard somewhere that a number of modern hedge funds have moved into investing in areas that expose them to Market risk, and so are not as safe an investment as they used to be, is that true?

[stainlesssteellemming]

They need to update their definition of "accredited investor" because they basically just described half the (employed) population of the Bay Area. Buy a house and wait a few years, and you probably have a net worth over 1 million. Get a software engineering job at one of the FANG companies and 200K is pretty common.

But I gotta tell you, most of these people are not "sophisticated investors"