Is This The End For Hedge Funds: Retail Investors Outperform “Smart Money” Ten-To-One
Thu, 11/12/2020 – 22:00
After a dismal decade for hedge funds, 2020 was the year that may have sealed the fate of the (former) masters of the universe who once upon a time collected 2 and 20 to hedge against crashes and to outperform the market but now merely collect tens of million in fees to come up creative excuses for sucking.
Case in point: at the start of the year, the so-called “smart money” was massively long the same handful of stocks, only to watch mortified as their portfolios exploded in March with hedge funds forgetting to actually “hedge”, and getting swept away with the market carnage. Then just as everyone flipped short in late March, the Fed launched the most batshit insane rescue of capital markets, which included injecting trillions in liquidity every single day and even buying junk bonds. Needless the say, the market ripped just as the hedge fund crew was short, leading to even more losses. Then around September, when hedge funds were doing what they do best – all jumping into the same handful of stocks – the rug was pulled from under them as the Nasdaq tumbled, quickly accumulating even more losses, and then, just two months later, the last nail in the coffin was hammered when momentum stocks – a perennial darling of those who supposedly collect millions to conduct in depth and extensive fundamental analysis but merely copycat each other’s trades – suffered a 15 sigma crash, obliterating what little alpha hedge funds had generated in 2020.
Unfortunately it wasn’t much, because after all that, with the S&P managing to eek out a modest 10% return this year as the Fed threw everything at the market in hopes of propping it up and pushing it higher, the HFR hedge fund index is just barely above 0.
Yet not everyone is sucking this year. The winners? Those who clearly got to benefit from a market that long ago stopped making any sense thanks to the Fed flipping fundamentals on their head, and actively buying risk assets and who knows what else in the open market.
Yes, we are talking about retail investors who are having the time of their life: as shown in the chart below, while the S&P is up 10%, and the average hedge fund is barely in the green, a basket of 50 most popular stocks held by the retail investing community is up a whopping 55% YTD. This means that retail investors – some as young as 16 years old on Robinhood – are outperforming the best paid investors in the world ten to one!
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