I am fascinated by hedge funds for several reasons: first, I admire great talent, skill and expertise in whatever form it manifests itself. Excellence should never be ignored or lightly dismissed. These handful of alpha generators have created an enormous amount of wealth for their investors. To quote Jim Chanos, it is the same few 100 managers today that were also creating wealth when he launched his fund 25 years ago.
Second, this is not a smooth bell curve distribution. The lure of these superstar performers, the appeal of these outliers, is why so many people pour money into the rest of the hedge fund structure, romancing alpha while forsaking beta.
My advice on hedge funds is simply this: If you are invested with a fund that is a consistent alpha creator, then stay with it. But most institutions and HNW investors often seem to be, to quote the Economist, invested in “a compensation scheme masquerading as an asset class.”