I spent ten plus years in the hedge fund industry as a professional hedge fund marketer. Most hedge fund managers are not frauds. They are well meaning, usually very smart guys who are desperately trying to put up good numbers.
It is a crazy, brutal business that eats most people alive.
Let me step back. There is a very tiny sliver of truly original thinkers in the hedge fund industry. I can probably count them on one hand. These guys are able to see through the incredible noise in the markets and understand the cycles and currents of industry. They are not people who strive to achieve a small amount of alpha above an index to please the institutions who have pretty much destroyed the industry with their demands for slim returns above mediocrity. These people look for asymmetric returns -- a loss of 100% or a gain of 1,000% percent or much more. Most investors can't possibly stay the course for the ride because when things look the worse these guys are doubling down against conventional wisdom.
It's just that humans are herding animals. We go to the restaurant that is full rather than the one that is empty. The stock market is just like that. Only a crazy, or perhaps brilliant person goes to the empty restaurant.
If you could invest with these people, you would. But they are just such a small part of the investing universe that there is no chance you can. And institutions are in such a box-checking, CYA mode that their own criteria is eliminating these unusual individuals. So just pretend these people do not exist, because for all practical purposes they do not. Very quickly they are able to compound their own money and they really do not need you.
So how do your beat the other 99.9% of professionals?
Hedge fund managers and active mutual fund managers come in the office and stare at their computers every day. They meet with their staff and pour over data for one reason only: they need to put up good numbers or they will either go out of business (hedge fund) or lose their job (mutual fund).
If they really are smart and try to do anything that runs against the current of the market, they will at some point be in a position of trailing the market. Before their original bet can pay off, they will be fired and investors will pull their money. If they play it safe and become "closet indexers", they will be fired because you can never beat the index and another manager will make a slight deviation against the index, beat it because they got lucky, and push you down in the rankings. The marketing people will complain and you will be fired.
An individual can easily beat these guys because of one reason only: the difference in time horizon. The professional is looking six to eight quarters into the future. If he can't make something happen in that time period, the infrastructure of people around him, along with existing and potential investors, will start doubting his ability. He has to make moves to beat the market in the short term, but here is the problem: It can't consistently be done. So he churns his assets in a desperate attempt to make something happen. That just makes things worse.
The individual has all the advantages. His time horizon can be decades. He does not have anyone looking over his shoulder, threatening to take away his job, home and status in the community.
I've had several personal experiences with this, but one stands out. I had about $100K invested in a trust for my daughter in early 2008. She is very young so all of it was in equities, invested in the Vanguard Total World Stock Market Index ETF (VT). By Feb. of 2009 my return was -$54K. That type of catastrophic loss would have forced the professional to make desperate moves. I did nothing.
That account is currently worth $113K. In the worst recession since the great depression I did nothing and made money. My daughter was under the age of ten. Time was on my side. Patience combined with knowing but benign neglect can work wonders.
By investing in harmony with your time horizon, buying broad market index funds, and having intelligent asset allocation that reflects your age and risk tolerance, you can achieve great things. Use the Vanguard Total Stock Market Index ETF (VT) for your equity holdings and split your bond market allocation 50/50 between the Vanguard Total Bond Market Index ETF (BND) and the Vanguard Total International Bond Market Index ETF (BNDX). You will be amazingly diversified at a ridiculously low cost.
Most people have a very long time horizon. Much longer than they realize. Instead of being patient, they get caught up in current events and try to time the market, failing to realize just about none of it will matter over a 20-30 year time horizon. It will all just be a small blip on a graph.
So be smart and don't try to play the professional game. They are largely losers and you have everything you need to be a long-term winner in the markets.