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Comment by rayiner | Hacker News Reader

> Yale’s comparatively modest $26 billion endowment, for example, made hedge fund managers $480 million in 2014, while only $170 million was spent on things like tuition assistance and fellowships for students.

For context, Yale's endowment produced an investment gain of $4 billion that year. Seems like the $480 million was money well spent.

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Is that investment gain net of the fund manager payment? Because an S&P 500 index fund would have returned 13.5% that year[1], or ~$3.5 billion, about the same as $4 billion minus the half-billion hedge fund managers costs. And presumably they had to pay other investment managers (for non-hedge investments), and the money in HFs is significantly less liquid and accessible and more volatile.

[1] http://performance.morningstar.com/fund/performance-return.a...

This is ignoring a lot that goes into investment management. It's easy to say S&P would have done just as well on that particular year, but what about every other year? What about years with big losses? Additionally, investment managers do things like create portfolios for you that match your risk tolerance or other special needs/requirements.

Overall, it's true that managed investments don't do as well as index funds, but it's ignoring a lot of the risk management that goes into being actively managed.

Being able to find where you are on the risk/return and growth/income spectrums is not hard enough to merit the hundreds of millions of dollars in fees.

For whatever strategy you want, find the corresponding index fund with that strategy, and it will probably have done better after expenses and will have more liquidity and less volatility.

Generally there is a small annual fee in addition to a cut of the profits. Profits on huge gaining years seem really high, but you're forgetting the essentially zero profit (or losses) on years with negative or no returns. Those years are not necessarily (and in reality, not at all) the fault of the hedge fund. They still provided a very valuable service in down or break-even years.

Also, managing billions of dollars is hard as shit and requires a ton of expertise and talented managers. You can't just take a hedge fund with $50 million and hand them $4 billion and say "do the same thing, but with more money".

Most active investment strategies are not scalable - true.

But the real issue is that there is no convincing proof that active managers can reliably out-perform passive investment strategies over long term.

They don't outperform them in terms of returns, but when it comes to risk-adjusted performance they do much better than index funds.

Could you point to the literature you have in mind that substantiates this?

There is not always one with the capacity for that kind capital.

When you have 40 BILLION to invest, you can't just dump it into an index fund.

Why not? Vanguard is managing $3 trillion just fine; an additional paltry $40 billion isn't going to tip the boat.

I wonder what would happen if you did dump it into an index fund...

One Vanguard fund has $186 billion under management. The whole company manages $3 trillion.

I think they'd be okay.

I really shouldn't nitpick (so please do forgive me), but strictly speaking the whole company doesn't manage $3T. It is true that's the best number to compare to the rest of the industry, but Vanguard has a rather unique corporate structure. The end result is that each Vanguard fund is a company which owns part of the umbrella group. This inverted corporate structure is set up so that the fund-owners have direct stake in management 1) of the umbrella organization 2) only of each individual fund, not other "leaves" of the tree.

It might seem like a distinction without a difference, but it's the single greatest reason their cost structure is so much more attractive.

> It's easy to say S&P would have done just as well on that particular year, but what about every other year? What about years with big losses?

Then the $4 billion in a good year is completely irrelevant. It's easy to say that investment managers would have done well in years where a chicken wasn't likely to do just as well.

Except that you'd also get the stock market's volatility.

I get your point but you can't really make that argument without considering volatility. Endowments in particular, need fixed income-like payment streams, as they're funding salaries and grants, after all.

It does not make sense to compare the returns of a $26b fund to that of the S&P 500. You are thinking like a small-time investor who can simply buy and ETF or index fund. When you have $26bn to manage, you need to do a lot of work to diversify it and spread it across tons of different assets in different markets (not just US equities). Yale's target for 2016 is to hold only 4.0% in domestic equity.[1]

A good comparison would be to another fund of a similar size. According to this Citi report [2] (most recent numbers I could find by AUM size), the average fund with >$10B in AUM in 2013 returned 13%. Note - there were only 18 hedge funds in the world that fell into that bracket. That average is lower in 2015 - how much? I'm not sure. But probably under the 11.5% net return reported by Yale in 2015.

[1] http://news.yale.edu/2015/09/24/investment-return-115-brings...

[2] https://www.citibank.com/mss/sa/conference/aslf/2015/docs/ci...

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