6 Things You Didn’t Know About Hedge Funds

6. So, should investors avoid hedge funds and invest in index funds? The answer is no. It is clear that it doesn’t make sense to invest in an average hedge fund. Most hedge funds take in more assets than they can manage profitably and abuse their dumb investors with sky high fees. It is also a fact that investors can’t generate any alpha by investing in index funds like SPY. Our research has shown that it is still possible to generate significant alpha in the small-cap space. The obvious decision is to ignore hedge funds’ large-cap picks and imitate their consensus small-cap picks. Hedge fund managers are smart people and they can outperform the market by large margins if they were managing a tiny fraction of their current assets. There are enough opportunities to manage tens of billions of dollars but there aren’t enough opportunities to manage $3 trillion profitably. Unfortunately they don’t want to turn away dumb investors and give up $120 billion a year in fees. It is also a fact that there are some hedge funds who still generate very respectable alphas pretty consistently. However, we find it more attactive to invest in hedge funds’ best ideas than investing in their all ideas.