My Yahoo!Bogle: There's more money to be made in the hedge fund business. But there's no evidence that mutual fund records are any different now, nor will they be in the future, because of defections. It's had no effect on Vanguard's actively managed funds, and obviously it doesn't affect our index funds. I doubt that it's systematically going to shift good returns from the mutual fund business to hedge funds. I think it is a craze and will come and be gone.
Hall: More money is not really the answer. They only make more if they have the returns. The 2% annual fee that the hedge fund manager gets doesn't put a lot into his pocket. Most of it covers expenses to run the company. The money really comes from performance. So why do they leave? A hedge fund isolates what the manager actually does. His ability becomes picking stocks, not having to bother with the administrative trouble of putting 85% of his fund's stocks into an index because he knows that if he doesn't track the index pretty closely, he could lose his job. His real value-added is not just replicating an index. That's why managers leave. It's a more appropriate use of their skills.
FORBES: Are hedge funds appropriate for retail investors?
Bogle: It's hard to think about them as a group. First, there are a wide variety of strategies. And then they have an astonishing failure rate. A paper I read from Professor William Goetzmann, up at Yale, says that the probability of a hedge fund or a hedge fund manager surviving for seven years is less than 20%. Barrons looked at the year 2000: Of 573 hedge funds they surveyed in the first quarter of 2000, 167 were gone by the end of the year. The studies we've talked about today say hedge funds are not competitive with the market, which is another way of saying they're not competitive with index funds. And I'd stand on that. The enduring values of investing for me are focusing on compound return over the long run, and it works. Alternative investors, as a group, will fall woefully short. So with hedge funds, be sure you understand the risks and the costs, and basically look before you leap. I don't think your typical retail investor should be in hedge funds and, if they are, do it in moderation, say 10% to 20% of their investments. Where they really don't change the characteristics of their portfolio much. I'd stay down the center and stay the course, because we could well have some rough weather ahead.
Hall: I agree with the long-term approach. It's easy to forget about the bear markets we've had, and how terrible they've been. In terms of the typical retail investor, I think with hedge funds the market needs more time to shake out some of the people who are not going to be successful. I don't think the investing public is quite ready for investing just in hedge funds. We've got to make the data more meaningful and have greater survivorship.
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