Institutional Investors are Delusional

June 8, 2016

I was skimming this recent publication from BNY Mellon and FT remark when a particular graphic caught my eye.  Below is a survey from 400+ real money institutional respondents (we’re talking endowments, pension funds, insurance companies, and sovereign wealth funds).  This is their estimate of the net returns they will receive from their hedge funds:

1% say 6-8%

32% say 9-11%

30% say 12-14%

32% say 15-17%

5% say 18% or more

Assuming the middle of each range that means the institutions are expecting their hedge funds to return 13% per year. Have you lost your @!$%X# mind?

That is the most asinine survey responses I have ever heard of but it EXPLAINS SO MUCH.  No wonder so many institutions can’t beat a 60/40 benchmark when they think that they are going to achieve 13% hedge fund returns.  Which, by the way, the hedge fund industry has only achieved TWICE in the past 16 years.  13% is about 50% higher returns than the industry has returned back to the 1990s (Barclays at 8%) and nearly THREE TIMES the returns from HFR (4%).

Oh, and by the way, a 13% NET return means you need to average gross returns of almost 20%.  Good luck with that.  Our friend Wes has demonstrated how that is nearly impossible to achieve and sustain.  

This reminds me of one of my favorite Charlie Munger quotes from Tren’s book : “I think the reason why we got into such idiocy in investment management is best illustrated by a story that I tell about the guy who sold fishing tackle. I asked him, “My God, they’re purple and green. Do fish really take these lures?” And he said, “Mister, I don’t sell to fish.”

I would love to know the 1% CIO that responded 6-8% returns, as most of the rest should be fired.

http://mebfaber.com/2016/06/08/institutional-investors-delusional/