On Sep 10, 2007, at 9:40 PM, raghu wrote:
I think DD meant "there are plenty of *index* funds out there which do a really excellent job".
No, I think he meant hedge funds. Vanguard's S&P 500 fund does an excellent job. This is an excerpt from a NYT piece by Yale's former investment manager, David Swensen, who really knows what he's talking about: <http://select.nytimes.com/search/restricted/article? res=F20E15F73E5B0C7A8DDDA90994DD404482> Most mutual funds do not produce even minimally acceptable results because of the conflict between the mutual fund company's profit motive and the mutual fund manager's fiduciary responsibility. Mutual fund companies profit by gathering assets, charging high fees and churning portfolios. Mutual fund managers produce superior investment returns by limiting assets, assessing low fees and trading infrequently. In case after case, profits trump returns. The mutual fund manager abrogates fiduciary responsibility for personal gain. Hedge fund investors confront even more dismal circumstances. As with mutual funds, undisciplined asset accumulation seems to be the norm. But hedge fund management fees are even more exorbitant than those levied by mutual funds; hedge funds typically add a ''profit participation'' fee, say 20 percent of any gains, to the already-too- large base fee. Portfolio turnover often surpasses the feverish pace posted by mutual funds, generating soft dollar kickbacks -- basically hidden credits granted by brokers for trading securities -- that line the manager's pocket at the investor's expense. In the zero-sum world of active portfolio management, where every winning position requires an offsetting losing position, over-the-top hedge fund fees virtually guarantee subpar results for investors. Just as in the mutual fund arena, hedge fund investors confront a problem that economists call adverse selection. The best money managers seldom operate in a mutual fund format, preferring to manage money for sophisticated institutional investors. Similarly, top-tier hedge fund managers favor stable, long-term institutions over fickle, performance-chasing individuals. As a result, individuals have access mostly to lower-quality hedge funds, increasing their likelihood of being defrauded by charlatans at places like the Bayou Group, Wood River Partners and KL Group. Less informed investors rely on an intermediary (often a fund that invests in a variety of hedge funds) to make fund choices. Again, the principle of adverse selection applies. The best fund managers avoid these ''funds of funds,'' which operate with shorter time horizons, in favor of a direct relationship with big long-term investors. Of course, the funds of funds add more fees to the already overburdened hedge fund investor, further reducing chances for success.
