According to Marketwatch hedge funds are scary. They are complicated, confusing and risky. If you’re a rich investor — the member of a wealthy family, say, or someone running a big endowment — you need someone to help you pick the right ones and avoid the disasters. To help you out, we’ve assembled two teams. On the one side we have assembled a highly professional group of investment advisers running a “fund” of hedge funds.
The members of your team boasts MBAs from Harvard and Stanford, and resumes packed with blue-chip names from Wall Street. They have wonderful PowerPoint presentations to show you how they will help you manage your money. They will impress you with their strict, “disciplined” investment process. They are tough on “alpha,” “beta,” and risk-management controls. They check out each fund thoroughly.
On the other side we put together a group of monkeys kidnapped from the local zoo. They hang off a tree while we feed them peanuts and bananas. Then we make hedge-fund managers walk past the tree. The monkeys throw peanuts, bananas and anything else that comes to hand. If something sticks to a hedge-fund manager, we select him for the fund. If it doesn’t, we don’t.
Which investment approach does better? I believe in reason, logic and the human mind, so I wish I could say the first. Alas, I have just finished reading “Assessing the Performance of Funds of Hedge Funds,” a research paper produced by Benoit Dewaele and Hugues Pirotte of the Universite Libre de Bruxelles (the Brussels Free University in Belgium), and Nils Tuchschmid and Erik Wallerstein of the Geneva School of Business Administration in Switzerland.
Read on at http://www.marketwatch.com/story/can-a-monkey-pick-a-hedge-fund-2011-10-26
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