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Old 09-03-2014, 06:50 AM   #26
ahnuld
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Re: Hedge Fund Manager welcomes your questions

how much of the investment decision is made by committee, how much ultimately comes down to the PM or CIO just picking stocks and bonds. Iv heard from some big firms that really the founder or CIO tends to do most of the selection and at the end of the day many analysts and committee are just for show and validation.
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Old 09-03-2014, 07:57 AM   #27
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Re: Hedge Fund Manager welcomes your questions

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Originally Posted by kimoser22 View Post
Have you ever hired a Political Intelligence Firm? If so, how accurate were their forecasts compared to the street consensus? Or in other words did they provide +EV information?

Thanks for posting.
We as a firm have fired political intelligence firm, but I am on the skeptical side on this issue. If you ever read Expert Political Judgment by Tetlock, you would know why (I sense you may already share my skeptical view)
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Old 09-03-2014, 08:02 AM   #28
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Re: Hedge Fund Manager welcomes your questions

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Where / how do you go about pitching investors for more capital?

What kind of "sales" material do you go into a pitch with?

Can you describe a typical pitch process in generalized detail?
There are large institutional investors (Endowments, sovereign wealth funds, fund of hedge funds, etc.) whose job it is to seek and invest in the best hedge fund managers. They are the lion's share of where we get capital (and where we spend time pitching).

Out materials largely consist of our historical returns, bios of key team members and a description of our process and what we feel makes us unique/good at what we do.
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Old 09-03-2014, 08:05 AM   #29
hedgefundguy
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Re: Hedge Fund Manager welcomes your questions

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Why do you want to write a book? Is your employer ok with you writing a book?
As I said, main goal is to dispel certain hedge fund myths I believe exist...and other members of the firm will want to review the book before it is published but I have a decent amount of autonomy. If they have strong objections to something I write or feel it opens us up to criticism,etc I will weigh their views carefully.
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Old 09-03-2014, 08:11 AM   #30
hedgefundguy
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Re: Hedge Fund Manager welcomes your questions

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What amount of assets (liquid and total) should someone have to invest in a hedge fund?

Is it smart to have so much invested in any one asset as you do?
In general, hedge funds are not great investments for all but a handful of individual investors--they are better suited to institutions for a number of reasons (including taxation, diversification, etc). There do exist some exceptions to this (hedge fund investments that DO make sense for more individual investors--see GLRE and TPRE)

And not is not smart in some sense, but given my goals in life I think it is logical (or I wouldn't do it). More on my goals in later posts.
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Old 09-03-2014, 08:28 AM   #31
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Re: Hedge Fund Manager welcomes your questions

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why would you keep working in a 10 bil+ fund? the investable universe starts to shrink at that level where some of the best potential investments are too small to matter, and presumably you should have enough money (100mm+) if you joined early enough to retire and manage your family money in a higher expected return manner?

So what drives you? Fame, respect, competitiveness, greed? I dont mean that to come off in an accusatory way, just trying to understand. doesnt seem like fun to me when you cant invest in a 500mm marketcap.
This is a fantastic question and I don't take it negatively at all. Incidentally, it is a question that investors (and potential investors) often ask.

All the things you mention (fame, respect, competitiveness, greed) are part of my utility function to some degree--my goal is to earn and deserve recognition as one the greatest investors of all time. I would like that to result in a fun, exciting and intellectually interesting life and I would like to be able to support charitable causes that I believe in. Doing well in my job opens doors to meet people I have hoped to meet (David being one of them) not only because I earn money, but because I have earned a certain amount of respect and fame. I want more

Another way of understanding my goals is to understand that I think of myself as a great player of games. I am a total strategy game addict (poker, magic, dominion, etc) and running a hedge fund (especially a multistrategy hedge fund) is in some ways the biggest most interesting game of all--a metagame. I want to win. Earning a higher rate of return for myself personally (assuming that would be possible, which is not as clear to me as you might think) would not satisfy my desire to play and succeed in this game.

So yes, I am greedy I suppose, but that doesn't seem to be my highest of goals (by my personal revealed preferences). I may have given more money away last year than I spent on myself. More money, in and of itself, does not make my life that much better.
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Old 09-03-2014, 08:30 AM   #32
hedgefundguy
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Re: Hedge Fund Manager welcomes your questions

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Originally Posted by Mason Malmuth View Post
Hi Everyone:

I also welcome hedgefundguy tp our forums. This should be a great opportunity for those of you who have an interest in this area.

Best wishes,
Mason
Thank you for the kind welcome. As I told David, Gambling Theory and Other Topics is on my all time greatest (and most influential) book list!
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Old 09-03-2014, 08:49 AM   #33
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Re: Hedge Fund Manager welcomes your questions

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What percentage of Hedge Funds can truly justify their existence? Aren't most just leveraged up gambling dens that use other people's money? Should the brightest minds be encouraged to get involved in Hedge Funds, as it is easily arguable that Hedge Funds add zero to the world, and any other activity that those bright humans could be doing would likely make the world a better place.

On a scale of 1 to 10, how big of a crime is the tax structure that has Hedge Funds and those involved only paying 15 percent? Should the Hedge Fund industry develop a Hall of Shame for those who blow other people's money, then start over as if nothing happened, under a new name, with new people's funds?

How come you never hear of Hedge Funds being involved in any of the historically great investments of all-time, like Exxon, Berkshire Hathaway, etc. If you had a son who was very bright as a young child, which would you be most disappointed in, if he chose it as a career, poker or finance/Hedge Fund?
A little harsh on the tone, but fair enough questions

Let me briefly address your points with the hope of coming back to some of them in much more depth later.

Gambling dens--in some sense we are gambling in that we risk losing money in and effort to make money. But our firm has (since our inception 12 years ago) earned approximately double the return of the SP500 with approx half the volatility. Investing in SP500 index fund is a gamble as well. We think we are a better one and hope to continue to prove to be so.

As far adding to the world, what I say to people is SOMEONE has to make decisions which companies, bonds etc are good investments. We could have a socialist/communist/benevolent dictator do so, but I think the invisible hand makes better decisions and makes society happier and wealthier. See North vs South Korea, for example. I think that justifies smart people's time (to make sure we as a society are allocating capital to other smart people, and not political boondoggles)

On taxes, I pay ordinary income tax rates on the vast majority (95%+) of what I make doing my job. The carried interest thing (15% rate) is much more available to private equity fund managers.

I would not likely invest in a manager that had previously blown up. I suppose exceptions are possible, but I largely share your view that it is probably foolish to do so. Would you (or others on the forum) stake a poker player that had declared bankruptcy once or more? Again, I suppose it is possible but it would make it less likely (by a large amount).

enough for now...
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Old 09-03-2014, 10:12 AM   #34
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Re: Hedge Fund Manager welcomes your questions

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Originally Posted by hedgefundguy View Post
Another way of understanding my goals is to understand that I think of myself as a great player of games. I am a total strategy game addict (poker, magic, dominion, etc) and running a hedge fund (especially a multistrategy hedge fund) is in some ways the biggest most interesting game of all--a metagame. I want to win. Earning a higher rate of return for myself personally (assuming that would be possible, which is not as clear to me as you might think) would not satisfy my desire to play and succeed in this game.
Glad to know I'm not alone on this one. For some reason girlfriends never understood how my competitive gaming habits (all of the above) linked to working at a hedge fund despite me spelling it out for them.

Given your value tilt/orientation (much like my firm) how are you changing your investment process to adapt to the current market conditions? My PM has basically said that this is much worse than finding anything in the internet bubble or 2007 since there were at least some sectors that were relatively mispriced as opposed to this cycle in which everything is just levitating based on government intervention/yields.
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Old 09-03-2014, 10:13 AM   #35
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Re: Hedge Fund Manager welcomes your questions

If you were a lowly 30-year old with 7 years of success beating the markets but no Wall Street background, what would be your strategy for breaking into money management? Assume you could get investment from friends and family in the low 7-digit area. Just start a fund with that, post a few years of market-beating results and attract outsiders from there (a la Allen Mecham)?
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Old 09-03-2014, 11:59 AM   #36
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Re: Hedge Fund Manager welcomes your questions

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Glad to know I'm not alone on this one. For some reason girlfriends never understood how my competitive gaming habits (all of the above) linked to working at a hedge fund despite me spelling it out for them.

Given your value tilt/orientation (much like my firm) how are you changing your investment process to adapt to the current market conditions? My PM has basically said that this is much worse than finding anything in the internet bubble or 2007 since there were at least some sectors that were relatively mispriced as opposed to this cycle in which everything is just levitating based on government intervention/yields.
These are not the easiest of times for the value focused relative value crowd, like us, to be sure. We still are finding what we believe are some market "mistakes" but they are fewer and farther between than the rich vein of irrationality we were mining the last few years. We are running lower volatility (betting fewer chips) and trying to stay patient.
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Old 09-03-2014, 12:04 PM   #37
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Re: Hedge Fund Manager welcomes your questions

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If you were a lowly 30-year old with 7 years of success beating the markets but no Wall Street background, what would be your strategy for breaking into money management? Assume you could get investment from friends and family in the low 7-digit area. Just start a fund with that, post a few years of market-beating results and attract outsiders from there (a la Allen Mecham)?
You need a combination of skill and luck to find success in this business.

The path you suggest is one that has worked for some. A long hard path to be sure, but not impossible as you note.

Another (not mutually exclusive) possible path is to publicly post your portfolio selections online along with detailed analysis. After a few years of success, you would definitely begin to attract a following. There is a dearth of good company research online (no shortage of bad research!) If you build it they will come.

I wish you good fortune and if you do start a site, post it in this thread.
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Old 09-03-2014, 01:07 PM   #38
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Re: Hedge Fund Manager welcomes your questions

If not for the public bailing out Wall Street in 2008, how would your firm have done if the markets would have been left alone, and Wall Street and the big banks hadn't been bailed out? What percentage of cash did you have on hand to invest between spring of 2008 and late 2009 or so?

Without cheap access to money and leverage, can you articulate how you or anyone else at your fund has an actionable investing advantage on any large market cap investment?

How do Hedge Funds justify the clearing of the decks each January 1st? For example, most Hedge Funds choose investments that can move fast. If 25 Hedge Funds own Apple on the last day of December, then that is the price that they calculate their gains with, and they take their percentage off of that without ever having the sold equity (mark to market). If on January 1st APPLE's CEO was indicted, or some huge negative event occurred, APPLE would plunge, yet the Hedge Funds would have taken their cut without ever having sold the underlying equity.

Hedge Funds are designed to transfer the money from the investors to the Hedge Fund partners. It is total speculation for most, and that is why you never hear about them having Exxon. Exxon is going to move wildly. It is an almost automatic money making machine that no person in the last 80 years could have lost money on if they tried.

I am hardcore because I know that very few people in the hedge fund industry have EVER paid their bills and improved their lives purely from investing. Asset gathering, even if you have a good eye for investments, after having never had success over time with true investing (Bill Ackman, plus many others) is not real investing. If you aren't going to suffer a negative lifestyle adjustment if you make a huge mistake, and have never had to navigate through situations where that would be the case, then you are just gambling with other people's money.

The only Hedge Fund guy who I have read about who makes any sense to me is Ray Dalio. I respect James Simons, but nobody really knows what is in the soup there. Throw in George Soros. Stanley Druckenmiller gets a lot of credit, but he really blew up during the tech bubble, and he was strictly a maniacal gambler who was lucky to get out somewhat alive, and very lucky to get out alive in his other fund he was running at the time. Steven Cohen is obviously a fraud. Don't know enough about John Tudor Jones.

To me, it is almost impossible to justify being involved. First, you can't really articulate an edge, and second, there is no way to justify why the smartest minds should get into finance, as it is mainly money transferring, and nothing at all is created.

Good luck to you. I mean that. I am just hardcore when it comes to 99 percent of all investment talk. People were playing a losing game in 2008 and there should be more stories out there of people who had to get real jobs. As it was, the regular guy on the street had his money transferred to the gamblers on Wall Street, and that is a huge crime. If it had played out in a fair way, where people have to pay huge consequences for being fully invested at the top, when they knew that 500K for houses were being given to janitors with zero down and zero documentation of income, then most all of the gamblers of other people's money would have suffered a permanent loss of capital like they should have.

The DOW went from 14,000 to 6,500 in just over a year. It was going way lower than that without transferring money from the public to Wall Street. So, almost all in the hedge fund world were fully invested during that drop, and that drop would have been much worse without the public bailout. Very few were short. Paulson borrowed money and created his own personal security to short, but he ended up being a horrific investor in the years after that. Haven't heard many, if any, stories of funds who got short near 14,000. Most funds are long only now. In the old days they may have gone short, but now it is just gambler, and then pump up the stock in public.

Last edited by dogmoon; 09-03-2014 at 01:13 PM.
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Old 09-03-2014, 01:36 PM   #39
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Re: Hedge Fund Manager welcomes your questions

What are your thoughts on the 2 / 20 fee structure and the evolution of fund fees in the future?
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Old 09-03-2014, 02:16 PM   #40
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Re: Hedge Fund Manager welcomes your questions

Is there a particular setup in a stock or a theme that you like to play? What makes it such a great trade/investment?
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Old 09-03-2014, 02:20 PM   #41
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Re: Hedge Fund Manager welcomes your questions

Can you give some information about entry level positions within a hedge fund?

-What types of college degrees are required (Bachelors in Bus Admin/Finance/ Risk Management?, or MBA required?)

-What certifications or skills are attractive to hiring managers?

-Where would one begin looking for entry level positions in a hedge fund?
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Old 09-03-2014, 08:17 PM   #42
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Re: Hedge Fund Manager welcomes your questions

Have you given much thought to what to do with your wealth? If you have kids, how do you keep them from being entitled?
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Old 09-03-2014, 10:52 PM   #43
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Re: Hedge Fund Manager welcomes your questions

A simpler question than most here, what is your definition of a hedge fund?

Is Berkshire Hathaway a hedge fund?
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Old 09-03-2014, 11:20 PM   #44
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Re: Hedge Fund Manager welcomes your questions

Please run me through what your typical day is like?

Last edited by OlafTheSnowman; 09-03-2014 at 11:34 PM.
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Old 09-04-2014, 02:32 AM   #45
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Re: Hedge Fund Manager welcomes your questions

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The lowest of the low are actually the big mutual fund guys, like all-time loser Bill Miller. These so-called value investors are some of the worst investors of all-time. 1. They are almost always fully invested and therefore, will never be able to truly load up at the lows when markets crash. 2. Most, if not all of them, were begging for money during 2008 and 2009. They couldn't buy the bargains, as they had to sell beaten down stocks in order to buy other beaten down stocks. That is why you have heard ZERO stories of any fund or Hedge Fund that was sitting on a ton of cash and then got the money it near the lows.

They will get drubbed soon in this market, too. Chasing yield ALWAYS leads to loss, and there is more chasing for yield right now, by all who invest, then at any time in history.
Warren Buffett has been mostly fully invested his entire life. Generally in cash you lose 6% a year to inflation. His fund Bill Miller looks more like a growth fund. Warren Buffett has a bet an index fund will beat some index of hedge funds and he is winning the bet, the fees are too high. It is nice to have some hedges, but they should not be hedges they should be investments. The best investors holders probably can hold 1 stock their entire career and beat most money managers. Dividend paying stocks beat the market. They might be overvalued now, but generally it is true.

What is the true long-term performance of a hedge fund, I would think it lags a sp500 index by 5 points a year or so. Yes, some of the activist hedge fund investors really helped improve the whole market especially from the stock option ripoff days of 1999.
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Old 09-04-2014, 04:23 AM   #46
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Re: Hedge Fund Manager welcomes your questions

Do you ever get frustrated at some of the CEOs and board members of this country? I know Icahn thinks they are going downhill in quality - reverse darwinism. That the largest majority shareholders from the Delaware corporations have too much power?
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Old 09-04-2014, 07:45 AM   #47
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Re: Hedge Fund Manager welcomes your questions

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Do you ever get frustrated at some of the CEOs and board members of this country? I know Icahn thinks they are going downhill in quality - reverse darwinism. That the largest majority shareholders from the Delaware corporations have too much power?
I am frustrated indeed, but more often by management and boards who act in their interests instead of the interests of shareholders--a classic principal/agent problem. This sometimes reaches the level of near theft.

The issue you raise--a majority shareholder squashing the minority holders--can also arise, but less frequently than the one I mention.

I do agree boards seem weaker and worse than ever.
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Old 09-04-2014, 08:24 AM   #48
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Re: Hedge Fund Manager welcomes your questions

The Little Book of Common Sense Investing by John Bogle says: "Hedge funds? No. Too much hype. Too much diffusion of performance among winners and losers. Too many different strategies. Too many successful managers who wont accept your money. Too much cost and too little tax efficiency. The management fees are so high that they often destroy even the small chance you have of winning. The hedge fund, it is said, is not an investment strategy but a compensation strategy."
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Old 09-04-2014, 08:39 AM   #49
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hedge fund fees

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What are your thoughts on the 2 / 20 fee structure and the evolution of fund fees in the future?
There have been a few questions on hedge fund fees and I would like to start to answer. Might not get all the way through this post but will have a start.

Instead of discussing hedge funds directly, let's use a poker staking analogy.

Imagine Phil Galfond is in the following situation. He is regularly playing in a 100/200 NL Holdem game where he has an hourly win rate of $200 and an hourly standard deviation (SD) of $2000.

He has an opportunity to move to a 200/400 table where his hourly win rate is $350 dollars and hourly SD is $4000. But Phil is reluctant to do so because, even though his win rate rises, the increased SD puts too much of his bankroll at risk.

You offer to share half the risk on the new table for half the profits, but Phil immediately recognizes this is not a good idea as (for him) this now means the new table has an hourly rate to him of $175 (350/2) and SD of $2000--worse than the table he is at now.

But, being the clever guy he is, he offers you the following:

He will agree to play 1600 hours at the higher stakes table if you--

Agree to share 50% of any net losses at the end of this period of play.

You agree to take only 40% of any net gains

and you pay him an hourly "management fee" of $20/hour.

Some questions for all of you:

Is this new deal better for Phil than staying at the smaller stakes table?

Is this a good deal for you? What percentage of the time will you win in this staking arrangement?

Do you see how this is similar to the 2/20 hedge fund model?
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Old 09-04-2014, 08:48 AM   #50
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Re: Hedge Fund Manager welcomes your questions

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The Little Book of Common Sense Investing by John Bogle says: "Hedge funds? No. Too much hype. Too much diffusion of performance among winners and losers. Too many different strategies. Too many successful managers who wont accept your money. Too much cost and too little tax efficiency. The management fees are so high that they often destroy even the small chance you have of winning. The hedge fund, it is said, is not an investment strategy but a compensation strategy."
Not exactly an unbiased source

He is right about tax efficiency for individual investors--a point I made earlier. It is rare for hedge funds to make sense but all but a handful of individuals--endowments and other large institutional investors are in a better spot to invest in hedge funds.

And as far as chances of winning, there is no shortage of evidence that some hedge funds (including the one I work for) have had long term track records that make us unlikely to be lucky coin flippers...many many standard deviations. It seems to me that anyone who would seriously examine the evidence would conclude that at least some hedge funds have more than justified their fees (see my poker staking post). And yes, many hedge funds have not proven to justify their fees (just as many poker staking arrangements have ended in tears).

More on evidence on hedge fund performance later.
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